The State Bank of Pakistan (SBP) has announced new collateral and eligibility criteria for its Monetary Policy Lending Operations, effective July 2025. These updated rules aim to improve risk management measures for financial transactions in Pakistan, specifically for operations such as Open Market Operations (OMO) and Standing Ceiling Facility. Below is a simplified version of the key changes for better understanding.
Collateral Requirements
SBP has introduced new collateral rules that depend on the maturity of government securities offered for financing. These rules apply a “haircut,” which is a reduction in the market value of the securities. The haircut percentage depends on how long the securities are to remain until they mature.
Here is the table summarizing the collateral requirements:
| Maturity Period | Applicable Haircut (%) |
|---|---|
| Up to 3-months | 0.2% |
| More than 3-months to ≤ 6-months | 0.4% |
| More than 6-months to ≤ 9-months | 0.6% |
| More than 9-months to ≤ 1 Year | 1.0% |
| More than 1 Year to ≤ 3 Years | 2.0% |
| More than 3 Years to ≤ 5 Years | 3.5% |
| More than 5 Years to ≤ 7 Years | 5.0% |
| More than 7 Years to ≤ 10 Years | 7.0% |
| More than 10 Years | 10.0% |
- Post Haircut Price Calculation: The price after the haircut is calculated as:
Post Haircut Price = Market Price of the security × (1 – Applicable Haircut)
Floating Rate Instruments (such as PIBs and GIS) will also be subject to haircuts, depending on their coupon payment frequency:
- Quarterly coupons/rentals: Haircut based on a 3-month maturity bucket
- Semiannual coupons/rentals: Haircut based on a 3 to 6-month maturity bucket
Counterparty Eligibility Criteria
The SBP has established criteria for institutions eligible to participate in its Monetary Policy Lending Operations. These institutions must meet specific financial and operational requirements:
1. General Eligibility Requirements
| Eligibility Criteria | Description |
|---|---|
| Regulated Entity | The institution must be regulated by SBP. |
| Current Account with SBP-BSC | The institution must maintain an account with SBP–BSC. |
| PRISM Participant | The institution must be part of the Pakistan Real-Time Interbank Settlement Mechanism (PRISM). |
2. Financial Soundness
SBP divides eligible institutions into two categories:
- Regular Participants: These institutions must meet the following financial requirements:
- Solvency Requirements: Institutions must comply with Minimum Capital Adequacy Requirement (MCR) and Capital Adequacy Ratio (CAR), as prescribed by SBP.
- Liquidity Requirements: Institutions must meet the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
- Watchlist Participants: These institutions fail to meet the capital and liquidity requirements. If they are non-compliant:
- Capital Requirements: The institution is allowed to participate but can only roll over existing loans, no new financing will be provided.
- Liquidity Requirements: If non-compliant, participation is limited to roll-overs only. The institution is given a grace period of 1-3 months depending on the severity of the breach.
Ineligible Institutions
Some institutions will not be eligible to participate in SBP lending operations. These include:
| Ineligibility Criteria | Description |
|---|---|
| Failure to Restore Capital/Liquidity | Institutions failing to restore liquidity or recapitalize within the grace period. |
| Failed Institutions | Institutions declared as failed under the Deposit Protection Corporation Act 2016. |
| Under Resolution or Liquidation | Institutions under financial resolution or liquidation processes. |
| Revoked License | Institutions whose license has been canceled or revoked. |
Implementation Timeline
The new rules will be applicable from July 2, 2025. The SBP has provided ample time for businesses and financial institutions to adjust to these changes. While the updated criteria take effect in 2025, all other instructions related to Monetary Policy Lending Operations remain unchanged.
Summary
The SBP new rules for collateral and eligibility criteria aim to strengthen Pakistan’s financial system by ensuring only financially sound and compliant institutions can participate in lending operations. These updates will help mitigate risks and improve overall stability. The changes also introduce more specific rules based on the maturity of collateral, making it easier for institutions to understand their obligations and risks. Financial institutions need to ensure they meet these new requirements to continue participating in SBP lending facilities.
