Financing export-oriented projects
The central bank will allocate more funds for fiscal year 2008-09 depending on the investment trends as reported by banks in May. All exporters including small and medium enterprises are eligible for loans under the scheme.
Almost all banks are participating in the scheme,’’ an SBP official disclosed. Bankers are looking forward to an encouraging response from their clients who, according to them, demand far too long-term financing for projects.
“We have been providing long-term financing for 12 years,’’ a top executive of a leading bank informed Dawn on Thursday. ‘’A few banks do provide long-term financing but very selectively and only to their chosen clients,’’ a leading industrialist pointed out and said the long-term financing is a very small part of bank lending. The bulk of long-term financing given by banking consortiums is for restructuring of privatised units.
Last week, when the State Bank Governor, Dr Shamshad Akhtar, met businessmen at the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) and at All Pakistan Textile Mills Association (APTMA), the most articulated complaint was that industrial investment has become too expensive, banks have become too choosy to offer loan facilities, exports are under strain because of rising production cost in which high interest rate on bank loans is a significant factor. She was told that industrial investment has come to a virtual halt, industrial production growth is down from 19 per cent in 2004-05 to seven to eight per cent and exports are trailing behind the target.
Under the SBP scheme, banks will offer long-term loans from three to 10 years for imported and locally manufactured machinery for the export-oriented projects ‘’The facility will be available to only those projects where annual exports fetch $5 million or at least 50 per cent of their sale proceeds is exports’’, is one of the conditions of the new scheme..
Businessmen fear difficulties in compliance of the condition as they are apprehensive of export performance in general and for textiles in particular. ‘’Persisting domestic inflation and likely slowdown in the US and EU economies would increase the cost of production on one hand and lower demand in two major markets’’, Mr Iqbal Ibrahim, Chairman APTMA warned the SBP Governor with reference to minimum export limit condition of the scheme.
While the SBP is providing 70 per cent refinance facility, the participating bank will put in 30 per cent. For the initial Rs8 billion proposed to be offered, the SBP has fixed service charges for refinance at 6.5 per cent for three years, 6.50 per cent for five years and seven per cent for 10 years. But the banks’ spread is 1.50 per cent for three years which will take up interest rate to eight per cent for the borrowers. For loans up to five years, the bank spread is 2.5 per cent which will raise the lending rate to nine per cent. On ten- year loans , the spread is at three per cent and interest rate goes up to 10 per cent.
“The bank spread is on very high side,’’ complained an industrialist who proposed that it should be one per cent for a period of three years, two per cent for five years and three per cent for 10 years. Industrialists want interest rate on loans to be at 7.5 per cent for three years, 8.5 per cent for five years and 9.5 per cent for 10 years.
“Banks are making bulk of their profit from stock exchange and foreign trade’’, a business leader remarked and said the manufacturing projects have a longer gestation period and need some accommodation in interest payment when the central bank is providing bulk of the loan money. Banks have been advised to take not more than two months in evaluating loan application under the scheme after getting full information from the borrower. ‘’Where the request is declined, the bank will explicitly apprise the reason to the borrower’’, banks have been told in clear words.
“There is also no maximum limit for seeking loan under the scheme by the borrowers. But in case, the demand is for more than Rs300 million, banks will be encouraged to form consortiums.
“Under the scheme, only new plants, locally manufactured or imported, are eligible for financing. The State Bank has specified the categories of business which are eligible to seek borrowing under the scheme. These are textiles, fabrics, garments, towels, made ups, synthetic textiles, leather and leather goods, rice processing, sport goods, surgical goods, carpets and wools. There are also developmental categories which include, fisheries, poultry, meat, fruits, vegetables and cereals processing, IT software and services, marble, granite, gems, jewellery and engineering goods.
Spinning is conspicuous by its exclusion from the list. The State Bank Governor was asked to include spinning in the list for concession rated financing. ‘’We want to encourage value addition,’’ she replied during a volley of questions put to her at the APTMA meeting.
Industrialists have largely welcomed the scheme but believe that the time is not appropriate. Bankers say that enquiries are being made and they intend to publicise the scheme n a big way. But there are doubts about response. Political environment is not conducive. ‘’Let the elections be held, a political set-up settled in Islamabad and provincial capitals and let it decide about the long and short- term priorities and policies. Then we will think of investment plans,” a leading industrialist remarked.
Bankers too do not expect much response in next few weeks. But a window opening for project financing for export-oriented industries is a good news in otherwise not too congenial environment.