For the first time the State Bank has allowed banks to raise foreign currency borrowing from international financial institutions, which will mainly benefit the foreign banks that have been facing problem to raise liquidity in the local currency.

The State Bank allowed the authorised dealers to raise foreign currency to convert into Pakistan rupee and use the same for liquidity management.

However, the circular issued by the SBP on Friday carried such restrictions, which only favour the foreign banks.

The banks, which will borrow foreign currency, were advised that ‘interest may be payable at a rate not exceeding the relevant Libor + 1.50 per cent.

Bankers said that while the government was borrowing at a rate higher than Libor +1.5 per cent, it would not be possible for Pakistani banks to borrow at such low rate. They said only foreign banks could borrow from the market or from their parent companies.

“Any exception to the above rate should be referred to Exchange Policy Department, SBP, for prior approval,” the circular added.

The minimum tenor of the foreign currency borrowing will not be less than 1 year. The borrowing bank (authorised dealer or AD) will be allowed to make payment of the principal amount in bullet at maturity or may start repayment of principal in installments after one year. However, frequency of the interest payment may be made in accordance with the related repayment schedule.

The borrowing bank (AD) will not be allowed to sell such foreign currency (FCY) funds out-rightly in the inter-bank market or to the customers. Similarly, such foreign currency funds cannot be used by borrowing bank for extending any foreign currency trade loan facility.

The ADs will not be allowed to offer any security, collateral or guarantee to the lenders as the borrowing will be clean and based on balance sheet strength of the borrowing bank (AD).

--The borrowing bank (AD) will be allowed to enter into FCY/PKR sell/buy swaps in the inter-bank market, though, the tenor of these swaps may range from 1-month to 1-year.

The SBP warned that at any point in time, ‘the outstanding amount of related Net Forward Purchases should not be lower than the FCY amount borrowed under this arrangement.’

The ADs are allowed to borrow foreign currency to a maximum of 50 per cent of their unimpaired capital as per their last audited financial accounts. The borrowing is permitted in currencies namely US dollar, euro, pound and Japanese yen.

The ADs were advised to report monthly FCY transactions to the Banking Surveillance Department and Exchange Policy Department by 10th day of the following month.

“The above permission is being granted to the ADs for their liquidity management. However, ADs are expected to exercise utmost prudence while entering into such arrangements,” said the circular.

Bankers said local banks were not required to raise liquidity through borrowing of foreign currency. They estimate that the foreign banks could raise Rs30 to Rs35 billion through this facility.