September 23, 2002	Monday	Rajab 15, 1423

THE RECENT cut of 41 basis points in the markup on the foreign currency export finance is a welcome move. But it is less likely to make the foreign currency export finance scheme of the State Bank really popular with the exporters.

Many of them say that the procedure for obtaining export finance under this scheme needs to be simplified further. They also say that even the reduced rate of markup under this scheme is higher than the rate their banks are charging on foreign currency trade finance.

“The lowering of the markup on foreign currency export finance scheme is a welcome move,” says convener of the export committee of the All Pakistan Textile Mills Association, Iqbal Ibrahim. But he warns that in order to make the scheme more popular with the exporters “the procedure needs to be simplified further.” He also points out that the current rate of markup on foreign currency export finance scheme is a bit higher. “It should not be more than LIBOR plus one percent,” he says.

Since LIBOR or London inter-bank offered rate, is around 1.75 per cent for six-months the markup on FCY export finance should be around 2.75 per cent.

But even after the recent cut of 41 basis points the markup on the foreign currency export finance scheme comes to 4.57 per cent i.e. both in case of pre-shipment and post-shipment. And in case of post-shipment financing where post-shipment insurance cover is obtained by the exporter the new markup rate is 4.07 per cent.

The new rates have gone into effect from September 16. Before that the markup on pre-shipment and post-shipment foreign currency export finance was 4.98 percent and in case where post-shipment insurance cover was obtained by the exporter it was 4.58 per cent.

This is the second rate-cut within six months. Earlier in mid-March, the SBP had cut the markup on foreign currency export finance by 86 basis points. And even before that it had lowered the markup rates by a huge 1.81 per cent in September last—five months after the introduction of this scheme on April 2, 2001.

But despite a cumulative rate-cut of 3.08 per cent within a year the foreign currency export finance scheme is still not very popular with the exporters for a couple of reasons. “Frankly speaking not many exporters are allowed to avail of this scheme,” says Vice Chairman of the All-Pakistan Textile Mills Association, Mushtaq Ahmed Vohra.

The foreign currency export finance facility launched with the financial assistance of the Asian Development Bank is designed to help exporters buy domestic inputs and also finance the import of inputs and raw materials. One of its objective is to give small and medium sized exporters an access to export finance.

This is a dollar-based window and is self-liquidating i.e. exporters can sell the dollars borrowed under this scheme to raise rupee funds.

But many exporters say they are denied access to this scheme by their respective banks for one reason or the other. “Sometime it is documentation...and at other times banks say they have run out of financing limits,” complains a local textile exporter.

Bankers also admit that the exporters have to go through a lot of documentation to avail of this scheme but they think that this is quite uncalled for, given the fact that it is a facility backed by ADB and as such the SBP has to monitor its working prudently.

Big exporters like Iqbal Ibrahim also support this view. Under the foreign currency export finance scheme that is available for upto six months export financing is made through participating banks that draw their limit of such export financing from the SBP. Under the rules of business set for the execution of the scheme the facility is provided by SBP from its special dollar window on first-come-first-serve basis.

And the balance sheet size of a bank is not the sole criterion for its eligibility to avail of this scheme. So there are chances that a bank declines to offer export finance under this scheme to a particular client for the reason that its own limit with SBP has exhausted or the exporter does not meet the eligibility criteria laid down in the scheme.

The criteria set for the exporters envisages among other things that the exporter seeking foreign currency export finance is in compliance with current environmental and labour laws and regulations.

Under the scheme the banks can charge a maximum spread of 2 per cent on foreign currency export finance. That is why while reducing the pre-shipment and post-shipment markup on foreign currency export finance from 4.98 to 4.57 per cent last week the State Bank also lowered its refinance rate from 2.98 percent to 2.57 per cent.

Senior bankers say it is not always the banks that decline to offer foreign currency export financing to the exporters under this scheme. “Sometimes the reverse of it is true,” says head of credit division of a large local bank. “Exporters tend to avail of much cheaper trade financing by their own banks instead of going through all the hassles of the ADB-funded scheme,” he says.

Senior bankers say leading local and foreign banks currently offer trade financing to exporters as well importers at 2.5-3.0 per cent to prime customers and at 3.5-4.0 per cent to ordinary ones. “Imagine why will an exporter avail of the ADB-funded foreign currency export finance at 4.57 per cent when he can get this facility at a maximum rate of 4 per cent from his bank,” questions head of corporate banking of a large foreign bank.

This rate difference also alters the preference of the banks. “If we can meet foreign currency borrowing needs of our customers through our own resources why should we ask them to avail of the foreign currency export finance scheme,” says another banker.

That also sounds more practical from the business point of view. If a bank offers foreign currency export finance to a borrower under the SBP scheme it would earn a maximum spread of two per cent—but the strict eligibility criteria for exporters would restrict the scope of such export financing. Besides the bank itself will have to meet a number of conditions to get the refinance from the State Bank.

On the other hand if it lends to a client in foreign currency out of its own resources it will earn almost a similar spread —in certain cases a higher one. And in turn it will be able to maintain a long-term business relationship with that borrower thus earning more through other forms of lending. Given the fact that most banks are generating foreign currency deposits at not higher than 1.5 per cent and that the total cost comes to 1.75 per cent the bank can earn a cool two per cent spread if he lends foreign currency funds at 3.75 per cent.

In most cases the bank finds such borrowers who are ready to pay 3.5-4.0 per cent on foreign currency borrowings. It is true that there are certain prime borrowers who get foreign currency funds from the banks at 2.5-3 per cent thus reducing the spread. “But only a bank knows what a hell lot of business such prime borrowers bring along with them,” says head of credit division of a privatized bank. “Besides the number of such prime borrowers are in tens —and not in hundreds or more.”

That is why whereas foreign currency trade financing of the banks have risen manifold in less than two years, the volume of foreign currency export financing is still very limited. Senior bankers estimate that all local and foreign banks combined have lent no less than $500-$600 million to their customers mostly to the exporters in less than two years. A senior official of the credit division of the state-run Habib Bank said his bank alone had lent more than $150 million foreign currency funds in about one and a half year.

Against this, the volume of foreign currency export financing made by all banks is estimated somewhere near a hundred million dollars. Or may be less than that.

But this does not mean that the scheme has become useless. In fact this scheme is a big source of relief for those small and medium size exporters who cannot get foreign currency funds from banks and whose ability to avail of the rupee-denominated export financing scheme is also limited.

The foreign currency export finance scheme runs parallel to the rupee-denominated regular export finance scheme under which export finance in rupees is available at 8 percent per annum.

Under the present circumstances when Pakistan is pressing hard to increase its exports amidst growing competition with rival countries this 8 percent markup on rupee export finance is quite high. And since the central bank has been holding interest rates since mid-February this year eclipsing hopes of cheaper finances it seems only logical for the SBP to try to make foreign currency export finance more affordable for the exporters by reducing its markup rates.