Govt to 'secure' ailing banks by credit guarantees on tax-payers' shoulders

[Naveed Yaseen]

MUSHTAQ GHUMMAN
ISLAMABAD (December 14 2008): The federal government has launched a credit guarantee scheme for the financially-troubled small banks, which are to be extended Rs 75 billion credit by the State Bank of Pakistan, well-informed sources in the Finance Ministry told Business Recorder.

According to the Letter of Intent (LoI) agreed between GoP and the International Monetary Fund (IMF), the SBP will prepare a contingency plan to deal with the ailing private banks by the end of December 2008. The plan will contain criteria for the SBP liquidity support, assessment of bank problems and intervention procedures. The SBP has already dealt with these banks through mergers.

The sources said credit guarantee scheme has been approved by the Economic Co-ordination Committee meeting, presided over by the Prime Minister's Advisor on Finance Shaukat Tarin. He, however, expressed displeasure over his ministry's working as the officials concerned failed to seek the Prime Minister's approval for the scheme. He directed the officials to take prior clearance of the Prime Minister for such proposals in future.

The Finance Ministry, in its summary, informed the ECC that in view of recent global financial crisis, credit activity of banks across the world is facing serious threats. However, Pakistan's banking and financial system cannot be fully insulated against the impact of global financial crisis, especially the sharply deteriorating consumer and business confidence.

"Small banks are experiencing liquidity constraints due to heavy withdrawals by the depositors and reluctance of big banks to meet their additional requirements," the sources said. Tarin, who chaired the meeting, stated that the government has introduced credit guarantee scheme for small banks to keep them liquid and effectively meet the liquidity crunch by allowing them to obtain credit facilities from the SBP, the sources added.

According to the scheme, federal government will guarantee repayment of all financial facilities extended by the SBP to small banks each having assets not exceeding Rs 50 billion, based on its annual audited accounts as of December 31, 2007.

The sources said facilities under the scheme have been restricted to an aggregate amount of Rs 75 billion. The scheme will be valid for one year. Federal government's approval has already been conveyed to the SBP after the Law Ministry vetted the scheme.

"Looking ahead, if there are severe strains in the interbank market and interbank lending guarantees appear necessary, these guarantees will be provided in limited amounts only to solvent banks," as per the IMF advice to the government in its LoI, the sources maintained.

http://www.brecorder.com/index.php?id=851987