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KARACHI, Oct 22: Textile millers want banks to reduce cotton finance margin because the sky-rocketing of cotton price during this season has made them poorer. They have sought a meeting with State Bank Governor Dr Ishrat Husain to apprise him of the problems facing them in meeting this and other requirements for borrowing money from banks to buy cotton. No date has been fixed for the meeting but textile millers hope that it may take place within a few days.
Textile millers say they want banks to reduce cotton finance margin from 10 to five per cent. But the letter sent to the SBP chief seeking discussions with him on this issue does not specify the reduction the millers want in cotton finance margin. Top textile millers also say they are seeking SBP intervention in the matter that the banks should consider the quality premiums of cotton while approving cotton finances instead of going only by Karachi Cotton Association spot prices that are only indicative in nature.
“We are going to raise these issues with the SBP governor from the platform of the All Pakistan Textile Mills Association,” says its newly-elected chairman M. Waqar Mannoo. “Exporters are dishing out much more money to meet 10 per cent margin requirement because of price flare-up in cotton,” Mr Mannoo told Dawn. He said he personally felt that the margin should be cut to five per cent.
The ex-gin price of cotton that does not include sales tax and transportation charges has shown a more than 50 per cent rise in the last three months to Rs3,400 per maund (37.3kg). “The prices shot up not only because of smaller than expected crop, but also because the growers are holding back their stocks, anticipating further rise in prices,” says former Aptma vice-chairman Mushtaq A. Vohra.
“A 50-per cent increase in prices means we are also paying 50 per cent more as 10 per cent margin,” he told Dawn.
When ex-gin cotton price was Rs2,200 per maund the millers were to pay Rs220 to the ginners to be able to get remaining 90 per cent financing from the banks. “Now they have to pay Rs340 i.e. 10 per cent of the new price.” The story does not end here. The 50 per cent increase in cotton prices has also increased the amount of sales tax the millers are to pay at the rate of 15 per cent. “When the cotton price was Rs2,200 per maund we were paying sales tax of Rs330. Now that the price has soared to Rs3,400 we have to pay Rs510,” laments Mr Vohra.
Millers are bound to clear the sales tax due on their monthly buying of cotton by 15th of next month to the sales tax department. They are entitled to get refund of the same after the cotton they bought undergoes value-addition and exported or sold locally but it takes a lot of time.
So the millers are not only taking the hit of higher prices of cotton they are also facing working capital shortage to finance 10 per cent margin and to pay additional amount of sales tax — and then keep waiting for months to get the refunds.
BANKERS VIEW: Senior bankers say cotton financing at less than 10 per cent margin is not feasible in most cases. “We may consider lower margin for very strong clients but that is what is,” said head of a large local bank who declined to go on record.
He said his bank was already accepting lower margin from triple A rated clients. “But generally speaking banks do need to have some cushion against commodity financing in anticipation of defaults and all that.”
Head of treasury of a bank pointed out that banks never made 100 per cent lending even against risk-free government-guaranteed defence saving certificates and special saving certificates, etc.
“Prudence demand and the State Bank regulations call for it that we mark some lien (on collaterals placed by borrowers for getting bank financing),” he said.
Head of credit at a major local bank said whereas reducing the 10 per cent margin seemed less feasible what banks could do is to add the premiums on high quality cotton while calculating prices of cotton stocks pledged for seeking bank credit.
Aptma chairman M. Waqar Mannoo confirmed to Dawn that one of the five major banks had started doing this. He said he had been in touch with other banks also to get this demand accepted.
When a bank adds the premium on high quality cotton while calculating the price of the cotton stock this creates more room for borrowing by its clients. Consider this to have an idea of how it works.
When a borrower goes to a certain bank, seeking cotton finance the bank in question accepts the spot price of the cotton stock he is going to pledge for the purpose of calculating its value. Even if the spot value is lower than the actual price the buyer is going to pay because of better cotton quality he has to finance out of his own resources the gap between this price and the price the bank has calculated.
The Aptma chairman says if the banks start taking into consideration the quality premiums on cotton prices (also provided by the Karachi Cotton Association) instead of going only by the spot value of the KCA “the liquidity crunch facing the millers will ease off to some extent.”
CREDIT OFFTAKE: Senior bankers say higher cotton prices would contribute to a buildup in the demand for the private sector credit, thus saving the banks with excess liquidity from sitting on idle money. In the first quarter of this fiscal year banks made Rs15.8 billion fresh private sector loans whereas in a year -ago period they had seen net credit retirement of Rs27 billion.
Heads of credit departments of banks say the buildup in the private sector credit offtake during July-September this year can be partly attributed to the rising cotton prices. They say that in October-December when cotton financing remains at its peak banks would definitely have to lend more to the private sector because of high cotton prices.
The annual credit plan projects private sector credit offtake at Rs85 billion for the fiscal year 2003-04. Bankers say banks are likely to meet this target.
In the outgoing fiscal year, the private sector credit rose to a record peak of Rs167 billion.
