SBP’s corrective measures to streamline the economy

Recently, the State Bank of Pakistan has taken many integrated measures to strengthen the domestic banking industry. The central bank has allowed the banks to use 30 percent of the Forced Sale Value (FSV) of stocks and mortgaged commercial and residential properties.  Due to alarming ratios of non performing loans the recent measures of the SBP was needed. It has multiplier effects. It would increase the overall profitability ratios of the banks.  In the long run, it may also discourage banks not to make heavy investments in the equity markets for maximization of profits. The central bank after consulting the technical committee of Institute of Chartered Accountants decided to fix the valuation date as 31.12.2008 but left it to auditor and the bank to decide the issue as per international accounting guidelines.

Many international monetary agencies have already predicted economic slowdown in the country in 2009. But it is also true that exemption for only dividend purposes would not benefit the shareholders. This additional cushion due to FSV relaxation would compensate for the impairment due mark-to-market valuation of investment through the P&L. According to many analysts the banking industry would benefit by Rs20-35 billion due to relaxation in FSV.  It would reduce the ratios of the credit crunch in the banking industry.  

In another circular the SBP has granted concession to the export-oriented industry in the form of a one-year moratorium on loans availed under its Long Term Financing Facility (LTFF) Scheme. It is worth Rs12 billion. LTF-EOP had been introduced in May, 2004 to help industries get loans on easy terms and conditions to import plant and machinery and the maximum period of financing was up to seven and half years. Now the SBP allowed banks and development finance institutions (DFIs) to provide grace period for one year to borrowers who had availed financing under the Long Term Financing for Export Oriented Projects (LTF-EOP), including Debt Swap Facility under LTF-EOP scheme and LTFF scheme. However, this would be a one-time facility effective from the date of the issuance of circular to March 31, 2009 and any request received by banks/DFIs after this date will not be considered.

The circular provides complete information and mechanism and under this facility, repayment dates for all installments of principal amounts falling due between January 1 and December 31, 2009 may be re-fixed after a period of one year from the respective due dates.  According to the circular, banks or DFIs will carry out their due diligence of the individual borrowers on case-to-case basis. The SBP will adjust repayment of its refinance accordingly for the concerned banks only in respect of such borrowers to whom grace period facility had been granted.


Certain conditions

The central bank has mentioned certain conditions for the deferment of the principal amount of such loans which are given as below.

(a) Account track record: the bank must evaluate the account/account holder past history. The bank must also rationalize its borrower creditworthiness and market repute.

(b) Conduct of account: a prudent banker should also consider the general attitude and professional conduct of its borrowers in order to consider them for this particular facility

(c)   Underlying collateral: all the mortgaged collateral must be concluded and revaluated

(d) Financial condition: the present prevailing conditions of the borrowers need to be considered. It may be checked from its balances sheets and market means.

(e) Future outlook: it necessary to secure the best interests of the banks. The future outlook (short and long term), chances of profitability, market share, specific conditions of macro-economy and even the thorough analysis of global economy may also be considered.

(f) Volume of exports: volume and velocity of the exports may also be considered.

(g) Overall risk profile of the borrowers: it is international practice to judge the overall financial profile of the borrowers which must be implemented in Pakistan too.

(h) Cases in which a loan has already been rescheduled by banks or where a borrower has defaulted in repayment of any installment fallen due as per original repayment schedule or payment of mark-up on due dates would not be eligible for the benefit.

(i)   The borrowers who have already repaid LTF-EOP/LTFF loans will also not be entertained.

(j)  It is further mentioned in the circular that if a loan is not payable during 2009 as per its original repayment schedule, it too will not qualify for the benefit under the arrangement.

The SBP has instructed all the banks and DFIs to keep on record the basis for grant of the benefit to the borrowers concerned, which will be checked by the banking inspection department of the respective banks. It is seemed that SBP has ensured and taken all possible measures so that the facility is allowed as per the laid-down criteria. It is now the duty of the concerned banks and DFIs that all given discretionary powers must be exercised in a decent and transparent way.


Current position of the exporters/exports

Due to many interconnected reasons local (acute energy crisis, high rate of interest, high cost of production, inflation, high rates of utility bills, deteriorating law and order situation, poor industrial infrastructure, shortage of technical/ skilled labour and above all decline in FDI and joint venture with foreign investors. The other international elements include global recession, credit crisis, weak economic prospects of the EU, USA, and limited access to international markets and specific countries. Because of all this, exports are now facing a tough time especially the textile sector. Exporters have been demanding extension of loan payments, due to slowdown in business activities and liquidity crunch have put them in a difficult situation.

Moreover, the domestic industrial sector is also on the decline and sharp reduction in the export growth has been reregistered. The federal bureau of statistics showed that Pakistan’s industrial output declined by over five per cent in the first five months of the current fiscal year in wake of international financial crisis, sparking fears of massive layoffs, particularly in the electronic and textile industries. Due to slump in the industrial sector, particularly in the large-scale manufacturing (LSM), the government has already witnessed decline in revenue collection and slowing down in exports proceeds, which registered negative growth in the month of December 2008. The textile related goods indicating that the 6.1 per cent LSM growth target set for 2008-09 is unlikely to be achieved. the federal bureau of statistics showed that production of cotton yarn declined by 0.31 pc, cotton cloth 0.49 pc and power-looms 48.03 per cent during the first five months of the current fiscal year over last year. Therefore, the demand of the exporters appeared to be genuine and the response of the State Bank to the situation is commendable.

Mixed reaction

The Chairman Chief Minister’s task Force for industrial development, Small and Medium Enterprises has appealed to Governor State Bank to prepare a bailout package to support industrial sector especially small industries. Also, the business community attached with cottage and micro industry need a relief that could be provided only by relaxation in loan-repayments and in the case of default, relief in terms of interest on loans and mark ups. The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) appreciated the decision of the governor State Bank of Pakistan for allowing a grace period of one year in repayment of the Long Term Financing Facility (LTFF) scheme.  The FPCCI suggested two years grace period in repayment of LTFF scheme.

The SBP has initiated corrective measures to provide cushion to borrowers as well as banks. It is now the duty of both the concerned parties to avail the facilities and contribute positively to the economy and help the country to prosper on all fronts.

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