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SBP warns banks against default on sovereign loans

FOOLS_NIGHTMARE

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The State Bank of Pakistan has instructed commercial banks to start taking into account the probability of default on loans taken by the federal government. This brings an end to decades-old belief that the government cannot default on domestic debt.

The central bank has issued the International Financial Reporting Standards (IFRS-9) instructions and withdrew an exemption from the expected credit loss on loans either guaranteed or taken by the federal government, revealed the July 2021 instructions that were to be enforced with effect January 1, 2022.

The IFRS-9 is the set of accounting rules that specify how a bank should classify and measure financial assets and liabilities.

According to a July 2021 SBP circular, these instructions will be enforced with effect from January 1, 2022 and the central bank has not issued any new order to extend the deadline.

The SBP’s instructions would also limit the banks’ ability to extend unlimited amount of loans to the government besides increasing the cost of borrowing. The enforcement of the six-month-old decision would coincide with the absolute autonomy being given to the SBP, including a prohibition on the government borrowing from the central bank.

The new regulations will force the banks to review their capital requirements and increase the money in proportionate to the weighted risks being given to the government loans.

In its official reply, the SBP said there would be some impact on the capital adequacy ratio because of the new regulations but it “will be negligible”. It also said that the expected credit loss on lending to the federal government would not be “substantial”.

“The SBP should not have implemented new regulations on the banking sector at this stage, as the country’s financial position is already not very stable and it will be disturbed even more because of this,” said Shabbar Zaidi, a former senior partner of AF Ferguson.

“As a result of the new regulations, the cost of government borrowing will significantly increase,” he added, demanding that the SBP should withdraw the new measures.

According to IFRS-9 regulations of 2019, commercial banks had been given an exemption from making a capital charge on loans given to the federal government. To enable this exemption, there was a clause in the old IFRS-9 regulation that read: “The credit exposure [in local currency] that have been guaranteed by the government and the government securities are exempted from the application of expected credit loss model and would not require provisioning.”

The July 2021 instructions revealed that the SBP had deleted this clause. This means that there is now a probability of default on the loans given to the federal government, which would eventually force commercial banks to make provisions against any expected loss. The deletion of this clause implies that the banks now need to calculate expected credit loss on these exposures.

This has huge implications for the industry, which considers government exposures to be credit risk free, according to one of the country’s top five banks. As a result, these exposures often carried very fine pricing, reflecting the low perceived risk, it added.

The bank’s written comments further showed that while the ultimate recovery of the loan was assured and hence any loss would always be considered zero, there would always be the impact of the time value of the money.

The decision becomes especially relevant considering frequent restructuring in these exposures, especially in the case of power sector.

The banking industry players said that similar exemptions had been given on the government lending in other countries where the IFRS was applicable, demanding restoration of the exemption facility. The banks will now need to calculate expected credit loss on the treasury bill and Pakistan Investment Bonds.

“This means that this will attract capital charge for the banks and impede their ability to hold unlimited government debt,” a Karachi-based banker told media. He said that irrespective of the prevailing interest rates, the banks would not be able buy the government debt beyond a threshold.

“The SBP would be stopped by the new law from lending to the government so who will fund the budget deficit in one to two years’ time?” he questioned.

Banking industry experts said taking expected credit loss would mean that there was a probability of default and the banks will have to increase capital adequacy ratio, which will carry a cost to them.

“No bank will bear the cost on its books without first recovering from the government by increasing the lending rates,” said another banker.

After a ban on the government borrowing from the central bank, the federal government can only meet its financing needs from the commercial banks. According to another amendment in the SBP bill that the National Assembly approved last week, the SBP’s primary objective will be domestic price stability.

Finance ministry sources said the central bank could pull a plug in the name of controlling inflation if the government remained imprudent in its debt-financed spending. This can then create problem for the government.

To a question about implementation of the IFRS9 by January 1, 2022, SBP chief spokesperson Abid Qamar said that the central bank was in consultation with the banking industry and had received feedback from them on the draft guidelines issued on July 5, 2021.

Qamar added that keeping in view the feedback received from banking industry, the IFRS-9 instructions and implementation date were currently under review. “It will be communicated to the industry in due course of time.”

However, as of now the central bank has not given extension in the implementation date. The sources said the banks had started preparing their balance sheets under new regulations.

To a question why the SBP deleted the clause, the spokesperson said these draft instructions were in line with IFRS-9 Accounting Standard Principles and Global Best Practices.

“The rationale for deleting the clause is that the expected credit loss on exposure to government is not substantial. Hence, the deletion of this clause would not have any material impact,” he added.

However, the reply suggests that the SBP expects some credit loss but continues to maintain it “is not substantial”. To another question about the implications of the new regulations on the government’s borrowing cost, the spokesperson said they were of the view that there would be no additional impact on the government’s borrowing cost.

However, the spokesperson agreed that the banks’ capital adequacy ratio requirements would increase but “there will be very negligible impact on the Capital Adequacy Ratios of the banks”. Although the new regulations imply that sovereign loans could default, Qamar said “this assumption is incorrect”.
 

313ghazi

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As SBP is becoming independent, it will no longer write blank cheques for the government. It is simply telling commercial banks to take that into account when issuing borrowing to the government. All borrowing entails a degree of risk management. If you know SBP is going to always print money for the govt whenever the govt wants it, then your loans to the govt are less risky. Now that SBP is going to be increasingly autonomous, it will consider the financial prudence of it's actions without political influence, and this note is just one of those things.

The SBP is not giving people a warning that the country is about to default. The headline is misleading.
 

blueazure

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Great to see that a country's own central bank doesn't want to issue its own Government with money. Only in the Banana republic.


....by the going of things, our newly independent SBP will ensure not a single commercial bank is able to do business in pakistan,

for a commercial bank, giving loans to the government is the most secure and fool proof investment/means of income in the world, THE LOAN IS PAYABLE with INTEREST guaranteed via govt taxes !

has the government ever defaulted to pay back the loan ?


---------

PTI walas can proceed to slap themselves -
 

Norwegian

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The SBP is not giving people a warning that the country is about to default. The headline is misleading.
What else did you expect from Maryam Qatari media cell?
@FOOLS_NIGHTMARE

Great to see that a country's own central bank doesn't want to issue its own Government with money. Only in the Banana republic.
Because it leads to continuous economic crisis. Pakistan was banana republic before this new change
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....by the going of things, our newly independent SBP will ensure not a single commercial bank is able to do business in pakistan,

for a commercial bank, giving loans to the government is the most secure and fool proof investment/means of income in the world, THE LOAN IS PAYABLE with INTEREST guaranteed via govt taxes !

has the government ever defaulted to pay back the loan ?


---------

PTI walas can proceed to slap themselves -
Commercial banks job is to give risk based loans to private citizens, commercial enterprises not risk free loans to govt. PTI govt corrected this old mistake. But of course Patwaris are unable to understand this given their support of status quo and business as usual.

I hope not, feels like a grand design to bring Pakistan to its knees, just like the former USSR.
Yeah when your favorite govts before PTI bankrupted Pakistan by printing unlimited currency from State Bank every 5 years, Pakistan was not on its knees
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blueazure

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I hope not, feels like a grand design to bring Pakistan to its knees, just like the former USSR.

how did the USSR collapse ?

1 . incompetent fools placed in every position of govt ( top to bottom) [ parallels to Pakistan quiet obvious ]

2. centrally planned economy [ SBP doing financial management to manage economy aka central planning ]


the collapse is not a one off event , its a gradual process which is visible here and there

1. hi inflation
2. corruption
3. discontent
4. a delusional state in denial


@FOOLS_NIGHTMARE what was inflation in post soviet russia AFTER they went to IMF ?
 

Norwegian

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how did the USSR collapse ?

1 . incompetent fools placed in every position of govt ( top to bottom) [ parallels to Pakistan quiet obvious ]

2. centrally planned economy [ SBP doing financial management to manage economy aka central planning ]


the collapse is not a one off event , its a gradual process which is visible here and there

1. hi inflation
2. corruption
3. discontent
4. a delusional state in denial


@FOOLS_NIGHTMARE what was inflation in post soviet russia AFTER they went to IMF ?
Your problem is not inflation but artificially overvalued exchange rate. Every govt tries to manipulate it leading to massive devaluation and thus inflation in future
@Patriot forever @farok84 @Dual Wielder
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CrazyZ

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Pakistani Banks need to more risk assessment and invest in the private sector far more. Currently they are weaned on buying only government debt since it doesn't require much thinking as is a guaranteed return.

The State Bank of Pakistan has instructed commercial banks to start taking into account the probability of default on loans taken by the federal government. This brings an end to decades-old belief that the government cannot default on domestic debt.
SBP can print money.....so default in PKR debt is not possible. Problem is that this is leading to lazy bankers that won't invest in the private economy.

IMO, judicial reforms are needed to reduce non-performing loans in the private sector. Ability for banks to "foreclose" on defaulters is limited in Pakistan.
 
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Patriot forever

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This is the best thing that happened. This will make the government balance its books better, I do not know why people will think of it as bad?

They no longer have the power to print unlimited money. The cost to the state is too much for such actions, this step directly led to 13.5% interest rate to pull back the 7 trillion liquidity pumped by the government (previous) . Do we have to repeat this cycle again and again.

If my coconut chicko tree in my front lawn was somehow able to grow currency instead of fruits I did be buying a ferrari.

Banks will be cautious of given me a loan and will not give me a loan to buy a ferrari instead of a corolla based on my income.

I think these examples will go through the dumbest of the lot.

Coming to sovereign guarantees that should be banned.
 
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redgriffin

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Pakistani Banks need to more risk assessment and invest in the private sector far more. Currently they are weaned on buying only government debt since it doesn't require much thinking as is a guaranteed return.

As someone who has worked in Pakistani banking on the risk management & internal audit side, I can say you have hit the nail on the head. This actually has made the Banks lazy dheet gluttons jinko araam se govt debt ki income mil jaati thi so they grew risk averse & deprived SMEs of credit funding. SMEs provide 80% of Pakistan's non agri employment & economic activity. Imagine if they had easy access to credit to expand & grow, the effect on our economy.
 

Norwegian

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This is the best thing that happened. This will make the government balance its books better, I do not know why people will think of it as bad?
You don't know? Check the Patwaris complaining because they won't be able to borrow unlimited money in case they (God forbid) return to power

Do we have to repeat this cycle again and again.
Yes. Pakistani economy works best under boom and bust cycles. Sher Sher
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As someone who has worked in Pakistani banking on the risk management & internal audit side, I can say you have hit the nail on the head. This actually has made the Banks lazy dheet gluttons jinko araam se govt debt ki income mil jaati thi so they grew risk averse & deprived SMEs of credit funding. SMEs provide 80% of Pakistan's non agri employment & economic activity. Imagine if they had easy access to credit to expand & grow, the effect on our economy.
Pakistani banksters are not lazy, they are crooks. They work hand in hand with big crooks to siphon off tax payer money.
 

Patriot forever

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how did the USSR collapse ?

1 . incompetent fools placed in every position of govt ( top to bottom) [ parallels to Pakistan quiet obvious ]

2. centrally planned economy [ SBP doing financial management to manage economy aka central planning ]


the collapse is not a one off event , its a gradual process which is visible here and there

1. hi inflation
2. corruption
3. discontent
4. a delusional state in denial


@FOOLS_NIGHTMARE what was inflation in post soviet russia AFTER they went to IMF ?

You actually described the previous government perfectly.

The inflation kicked in as soon as the currency support was withdrawn ( no longer overvalued which was used to keep the inflation artificially subdued by flooding the market with cheap imports against the excess liquidity injected by government through direct SBP borrowing).

This is the root cause of the damage done to us.

The ammendments done are necessary to achieve sustainable growth, ' chadar dekh kay pao phalao' is the phrase that does this ammendment justice.

Increase your revenue and stop relying on the printer is the message.
 

Patriot forever

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....by the going of things, our newly independent SBP will ensure not a single commercial bank is able to do business in pakistan,

for a commercial bank, giving loans to the government is the most secure and fool proof investment/means of income in the world, THE LOAN IS PAYABLE with INTEREST guaranteed via govt taxes !

has the government ever defaulted to pay back the loan ?


---------

PTI walas can proceed to slap themselves -

You do realise the consequences of government just spending printed money as much as it likes?
 

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