KARACHI, Nov 24: The ongoing loan price war has forced major local banks to quote below two per cent mark-up on their financing to state-run organizations and government departments for purchase of commodities.

Sources at the Sindh food department told Dawn that National Bank and Habib Bank had agreed to make a mid-term review of the mark-up on the finances provided to the department for purchasing wheat from the growers.

In October, two state-run banks had agreed to charge 2.35 per cent mark-up on their combined lending of Rs6.9 billion to the department for October-December 2003. This was 40 basis points lower than the mark-up charged by two other major local banks in July-September this year.

The sources say senior officials of the department approached NBP and HBL in the middle of this month asking them to make further cut in their mark-up on the ground that the Punjab food department had secured financing from leading local banks at 1.90 per cent. Accordingly, the two banks had to lower their mark-up to 1.90 per cent — though not without reluctance — in the face of the ongoing loan price war.

The sources say that out of the Rs6.9 billion financing the Sindh food department had received from NBP-HBL at 2.35 per cent mark-up, a little less than Rs2 billion were repaid before the banks further lowered their mark-up to 1.90 per cent. So, the new mark-up would be applicable on the unpaid financing of about Rs5 billion, reducing the department’s cost of borrowing by Rs22.5 million or so.

At 1.90 per cent, the rate of mark-up being charged by the two state-run banks is quite low, only 25 basis points, up from the last cut-off of six-month treasury bills. On November 12, the SBP had left the six-month T-bills cut-off unchanged at its September 18 level of 1.65 per cent. This means, that the spread between the six-month T-bills cut-off and the mark-up to be charged by NBP-HBL has fallen from 70 basis points to just 25.

Banks’ lending to the provincial food departments for wheat procurement, which forms part of the central government’s commodity operations, is backed up by sovereign guarantee and carries no risk of default. That is why major banks, not only those in the public sector but also the privatized ones, do not hesitate much in pricing their advances at very cheap levels.

Bankers say the banks that provided finances to the Punjab food department at a low rate of 1.90 per cent were led by Muslim Commercial Bank. Even before that privatized Muslim Commercial Bank and United Bank Ltd had agreed to finance wheat-purchasing operations of the NWFP food department at 2.08 per cent for October-December 2003, down from three per cent in the preceding quarter.

SUGAR PROCUREMENT: And now, the Trading Corporation of Pakistan says it has secured Rs4 billion financing from these banks at a record low markup of 1.71 per cent for procuring sugar. At this level, the mark-up is only six basis points above the last cut-off of six-month treasury bills. TCP officials say that this mark-up would remain valid up to June 30, 2004 without any quarterly review.