KARACHI, March 11: The State Bank of Pakistan has allowed banks to finance wheat procurement by the private sector but restricted them to finance only “eligible borrowers.”

In a detailed circular issued on Tuesday, the SBP said the banks will provide finance only for the new wheat crop (2008) and the borrowers should be restricted to use the loan only for the purpose of wheat procurement.

The banks will provide financing facilities against pledge of fresh wheat stocks only and will not extend funds to the private sector for procurement of wheat against hypothecation or charge of moveable or immovable property.

The central bank attached a series of conditions for financing wheat procurement by the private sector in the wake of last year’s experience when the financing was massively used to create shortages and increase the wheat prices by 40 to 50 per cent.

The private sector was involved in early export of wheat, creating shortages, hoarding of wheat and had artificially increased the commodity prices to a level never witnessed before in the country. The SBP had then stopped the banks to advance finance to the private sector for wheat procurement.

However, the SBP has been providing financing for wheat procurement each year. Bankers say that the massive production of wheat, which remains around 20 million tons each year, can not be handled alone by the public sector organisations.

But the private sector involvement at large scale deprived the people of cheaper flour as the hoarding and smuggling dominated the wheat market, which is still obvious from the long queues outside the utility stores across the country. The flour prices fell but were still 60 70 per cent higher than last year.

The SBP said banks will continue to provide financing facilities to their eligible borrowers (licensed functional flour mills only) for the procurement of indigenous wheat.

Special efforts may be made to ensure that the facilities, obtained for other purposes, are not utilised for financing of wheat stocks, it added.

The SBP also increased the cash margin requirement from 10 per cent to 25 per cent of the value of the wheat stocks.

“Banks will not provide any financial facilities to enable borrowers to meet the margin requirements,” said the SBP.

The banks will also monitor that the stock of wheat purchased by the concerned functional flour mill has been grinded and that the by-products of wheat — flour, maida, suji, etc, — financed against bank loans have also been released to the market gradually to repay the loans so obtained.

“Financing against the by-products of wheat will also be subject to the cash margin of 25 per cent,” said the circular.

The banks were also allowed to provide facilities for wheat procurement by the seed processing plants, in line with their lending policies and the capacity or production plans of the seed processing plants. However banks may ensure that such stock of wheat will be used for processing purposes.

“Banks will ensure that no revaluation of the pledged stock is considered for release of any differential amount to the borrowers against stock of wheat pledged with the banks,” said the SBP.

The banks will ensure that the weekly stock report for the wheat held by functional flour mills and pledged with the bank is inspected periodically. Report on the inspection should be submitted regularly to the SBP this within seven days from the close of the month to which it relates, indicating the name of the party, location of its godown, etc.

The SBP would also verify the authenticity and genuineness of such inspection reports through its Banking Inspection Department and any concealment of the fact or misstatement in this regard will attract penalties.

The banks will also ensure that the wheat stock is gradually released to generate cash resources for the purpose of repayment of bank loan.

The banks will continue to submit a weekly statement in respect of financing to private sector for wheat procurement within seven days from the close of the relevant week. The SBP said the delay in submission or misreporting of data reported to the central bank will attract penalty.

“These loans will be repayable on or before December 31, 2008 positively,” said the SBP.