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SBP advises banks/DFIs to use KIBOR as benchmark rate

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SBP Diary - SBP News

The State Bank of Pakistan (SBP) has advised the commercial banks and development financial institutions (DFIs) to use inter-bank offered rate (KIBOR) as a benchmark for determining pricing of all rupee corporate/commercial banking lending.

In a circular issued here on Wednesday, the SBP said the objective of benchmark with KIBOR was to encourage transparency and promote consistency in the market-based pricing of loans.

The central bank said: “Some banks are using longer tenor benchmark rates for shorter tenor loans.” “The most common practice, noticed by the State Bank, is to re-price a three-month loan by using benchmark of six-month KIBOR.” This practice is not correct. It is, therefore, clarified that: “For fixed rate time loans, the tenor of the benchmark rate should be the same as the tenor of the fixed loan. If a loan has a fixed rate for 2-3 years, then KIBOR tenor of 2-3 years should be used.”

“For tenors exceeding three years and not covered by KIBOR, banks are advised to use appropriate benchmarks such as secondary market yields on the relevant tenor of Pakistan Investment Bonds.”

“For floating rate time loans, the tenor of the benchmark rate should be the same as of re-pricing tenor set for the floating rate loan, if a loan is re-priced every six month, then six month is the relevant benchmark, whether the loan is of 1,2 years or any other term.” staff report.

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