THE number of requests for financing received by the commercial banks under the State Bank of Pakistan’s (SBP) refinance scheme for setting up new industrial projects or for undertaking expansion/ Balancing, Modernisation and Replacement (BMR) at the existing facilities shows significant demand from the industry for longer-term, cheaper loans in spite of the tough business conditions. At the same, the published SBP data indicates, the banks are reluctant — or at least very slow — to approve the loans because of the ‘risks’.

The published SBP data does not provide disintegrated information on the pending or approved loan requests, making it hard to scrutinise the types and sizes of the projects for which the financing has been requested or approved. Nor does it reveal if the financing has been requested or approved for a new project or capacity expansion/BMR at the existing facilities, and in which sector.

According to the SBP, the banks have so far approved total loans of Rs11.8 billion for 31 projects under the scheme, which was launched by the bank on March 17 as Temporary Economic Relief Facility (TERF) to stimulate the economy as the coronavirus infections spread.

The requests from another 62 projects for Rs60.3bn remain pending with the banks. It is also interesting to note that the first 36 companies to seek subsidised loans under the scheme had applied for Rs36bn — or half of the total amount of the loans requested under the scheme so far — by April 30.

Bankers could not avoid the restructuring of existing loans but in the case of new financing, only viable companies with clean balance sheets and good cash flows will be chosen

The refinancing scheme was originally launched by the central bank to provide cheaper loans at a fixed end-user rate of 7 per cent for 10 years at a time when the bank’s policy rate stood at 12.5pc. Initially, the scheme was meant for the financing of up to Rs5bn for new projects to be set up before March 31 next year to support and stimulate fresh investments of a total of Rs100bn in the manufacturing in the wake of the Covid-19 contagion.

Later, the scheme was opened for expansion of existing projects and BMR to make it more attractive for firms and the end-user rate was slashed to 5pc to provide further stimulus to the economy as the discount rate came down to 7pc. The scheme allows the purchase of new plant or machinery that is imported or locally manufactured against foreign letter of credit (LC) and inland LC. However, the loans cannot be used to procure used plant and machinery, land or carry out civil works.

Bankers concede that they are reluctant to advance new loans under the scheme owing to the negative economic effects of the coronavirus lockdowns, and the uncertain business outlook. “At a time when major companies are defaulting on their existing loans and coming to us for deferment of the principal and rescheduling of their payments, we have to be extra careful in assessing and approving new financing requests,” a senior banker told this correspondent.

Large scale manufacturing had already been contracting for around two years and the credit to the private sector was already shrinking in the pre-Covid-19 period because of economic stabilisation policies and a discount rate as high as 13.25pc. The banks’ nonperforming loans were also on the rise.

Under another SBP scheme launched to avert large scale defaults in the virus period, the banks have deferred Rs623.3bn in principal amount for up to one year and restructured/rescheduled loans of Rs152.2bn. Additionally, they have also disbursed Rs125.9bn under the refinance scheme for wages to protect 1.23mn jobs at 2,068 businesses.

He said the bankers could not avoid restructuring of the existing loans to help their customers. “It was something forced upon the banks by the circumstances. But in the case of new financing, we have a choice. Either we select only viable companies with clean balance-sheets and good cash flows or won’t finance the requested project. Even if the central bank is providing refinance for the scheme, the risk is still to be borne by us. We cannot finance a company in distress in the midst of the global health crisis,” the banker said on condition of anonymity.

Pakistan Business Council chief executive officer Ehsan Malik says these are not normal conditions for new investments. According to him, the first priority of the companies — small to large — is to survive this pandemic. “The question of investments in new projects or capacity expansion is secondary to most of them in the given circumstances.”

Nevertheless, he is of the view, many firms that had already planned BMR but had delayed their plans because of high interest rates seem to have decided to take advantage of the cheaper financing. He says most of the loan applications approved or still pending with the banks seek financing for BMR. “The scheme attracted much better response soon after the central bank opened it for expansion and BMR of existing projects. The banks are taking their time processing these requests because of the risk involved,” he says, adding the funds available under the refinance scheme will mostly be consumed by the large corporations with a small portion going in the direction of medium-sized firms that have some kind of credit relationships with the banks.

The Overseas Investors Chambers of Commerce and Industry (OICCI), whose members have invested $3bn — mainly in telecom, energy and chemicals — and contributed almost a third of the country’s total tax revenue last year, isn’t bullish on the investment prospects in the ongoing year. “Our member companies will be making some investments but the quantum is expected to remain much below last year’s level even if the health crisis has not affected all the sectors,” OICCI secretary-general Abdul Aleem says.

“Covid-19 has changed the situation; there is a lot of uncertainty in the markets as no one can predict if and when the situation will normalise. This situation makes it difficult to expect investment in new projects — at least not in the near term.”

Published in Dawn, The Business and Finance Weekly, July 27th, 2020