Banks seek SBP regulatory waivers for Rs1.275 trillion circular debt financing

KARACHI: Major Pakistani banks are turning to the State Bank of Pakistan (SBP) for essential regulatory waivers and exemptions following their agreement on a term sheet to finance the clearance of Rs 1.275 trillion in circular debt.

This deal, which involves 18 commercial banks and the state-owned Central Power Purchasing Agency (CPPA), represents the largest financing agreement in the history of Pakistan.

This six-year arrangement is designed to inject liquidity into the ailing power sector of the country. However, the banks involved state that final disbursements are contingent upon the SBP addressing several unresolved issues, reported Nukta.com

Sources indicate that the banks are requesting the central bank to classify the entire facility as sovereign debt. If this request is granted, it would enable banks to enjoy a zero-risk weight, thereby not affecting their capital adequacy ratio (CAR), providing exemption from per-party exposure limits, eliminating provisioning requirements in case of payment delays, and waiving allowances for Expected Credit Loss (ECL).

Despite these requests, the SBP has signalled that it may not approve exemptions for fair value losses.

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In response, lenders are seeking permission to spread any such losses over the six-year term of the agreement, similar to the approach taken during the restructuring of Pakistan International Airlines (PIA).

As per the sources, there are several other issues that need to be resolved before the disbursement of funds can occur.

The financing facility is expected to yield a return of approximately 10 to 11 percent, linked to the Karachi Interbank Offered Rate (KIBOR) minus 0.90 percent.