KARACHI, Jan 21: Karachi inter-bank offered rate or KIBOR will become a valid reference rate for corporate lending by banks from February 1.

A decision to this effect was taken by heads of all banks at a meeting with senior officials of the State Bank held at SBP Headquarters here on Wednesday. Deputy Governor Tawfiq A. Husain was in the chair.

Bankers who attended the meeting said the nitty gritty of the plan to use KIBOR as a reference rate had been finalized by a group of senior bankers and on Wednesday heads of banks endorsed this plan. They said the meeting decided that initially KIBOR of one-month; three-month and six-month would be used as a benchmark for all corporate lending in the local currency from next month. They said that the banks had agreed on extending the KIBOR tenures to one year by March 31, 2004 and then to three years by December 31, 2004 for using it to price corporate loans of similar tenures.

"The main purpose of this plan is to introduce some uniformity in corporate lending rates," head of a foreign bank told Dawn after attending the meeting. "This will promote the culture of floating rate lending and will make corporates more efficient in cash flow management," he said.

"The use of KIBOR as a reference rate (for corporate lending) will make the monetary policy more effective," said a senior SBP official. Introduced in September 2001, KIBOR has since been used as a reference rate for inter-bank lending and bankers have remained averse to using it as a benchmark for corporate lending. They still have reservations about making KIBOR a real benchmark for customers lending. That is why they have decided to use it as a reference rate only for corporate lending, excluding many other key areas.

A joint statement issued by the State Bank and Pakistan Banks Association says KIBOR as a benchmark rate will not be applicable on (i) export finance scheme (ii) consumer financing and SME lending (iii) overdrafts and running finance facilities existing before January 31, 2004 (iv) term finance certificates/ commercial papers approved by SECP or submitted to any stock exchange before January 31, 2004; and (v) all term loans with agreements executed before January 31, 2004. "However, if the pricing is renegotiated the pricing of such loans will need to be benchmarked to KIBOR within the available tenors."

The SBP-PBA statement says that overdrafts and running finance facilities extended prior to January 31, 2004 "must be benchmarked to KIBOR at the time of renewal of the facility or when the same is due for repricing." This has annoyed the business community.

"This is amazing that a very formidable monetary decision has been made between the banks and the SBP without involving the most important stakeholders - the borrowers," said ex-chairman of Site Association of Industry, Majyd Aziz. "We still have time. The SBP should convene an urgent meeting with representatives of trade and industry before putting this decision into effect," he told Dawn.

The SBP-PBA statement says: "The banks and the borrowers will be free to decide the relevant tenor of KIBOR and the spread over KIBOR at their discretion. KIBOR will be set for the lending facility on the date of drawdown or on the mark-up reset date."

"The offer letters from the banks to their clients should clearly indicate the KIBOR's tenor and the agreed spread (and) frequency of revision, etc." The SBP has asked all banks to comply with the said requirements regarding benchmarking of their corporate lending to KIBOR. "The State Bank has cautioned that it will take appropriate regulatory actions if any violation is committed in this regard," says the SBP press release.