KARACHI, April 24: Seeking bank loans may now become easier as the banks get a free hand to decide whether or not to charge a margin against a lending facility. Previously they had to observe certain margins fixed by the State Bank against certain types of loans and advances.
But the banks are supposed to continue to observe the margins requirement of the State Bank on shares and TFCs or term finance certificates. They are also bound to implement 100 per cent cash margin requirement against import letters of credit of caustic soda.
The central bank has notified to all banks this change in the policy through a circular issued by its Banking Policy Department here on Saturday.
Keeping margins against lending facilities mean requiring the borrowers place in cash or in approved securities the value of the margin before seeking bank finance. In many cases borrowers do pledge other acceptable collaterals including stocks of goods and commodities for this purpose. Whereas cash margins normally apply on import letters of credit keeping margins in securities or in collaterals of commodities is common among the seekers of running finances.
In January 2003, the central bank had issued a circular that embodied all relevant instructions of SBP on margin requirements issued separately from time to time.
The SBP has now withdrawn this circular. It has allowed the banks "to fix/determine the margin requirements on facilities provided by them to their clients for Corporate/SME and Consumer financing taking into account the risk profile of the borrowers."
This is no mean feast for the business community. "We do appreciate the swift action taken by the central bank on our recommendation," says Dr Mirza Ikhtiar Baig. Mr Baig who heads the banking sub-committee of the Federation of Pakistan Chambers of Commerce & Industry told Dawn he had raised this issue at the Credit Advisory Committee of the State Bank only a couple of days ago.
He says the SBP move would help the borrowers in a big way but fears that the benefits of this liberalized policy may not reach them "if banks misuse it."
"Banks should not calculate margins at the forced sale value of the assets and then also keep charging higher margins." The margins should be calculated "at the market value of the assets," he said when reached by Dawn over telephone for his comments.
"Besides banks should refrain from adding up the markup on the financing facility beyond its approved tenure," he emphasized.
President of National Bank Syed Ali Raza also appreciated the SBP move from bankers point of view. "This would give us more room to accommodate good borrowers," he said when reached by Dawn over telephone. Mr Raza said that the permission accorded to the banks to fix margin requirements on their own would not only help banks do more business but also enable good but small borrowers to seek liberal bank credit.
Credit disbursement to the private sector has been at an all time high so far during this fiscal year. Between July 1, 2003 and March 27, 2004 the private sector made a net borrowing of Rs237 billion from the banking system more than double their borrowing of Rs101 billion in the year-ago period. Bankers and businessmen say the SBP move to all banks to fix margin requirements on their own may help them keep up this fast pace of credit disbursement.
"This will particularly help small borrowers in all sectors including the export-oriented industries," says a leading textile exporter Mr Rafiq Ibrahim.
"It will help banks realize the potential in non-conventional areas of borrowing as well," he said when reached by Dawn over telephone for his comments. "This is a right move in the right direction."
