KARACHI, Jan 17: The State Bank has told the banks involved in commodity financing that the rate at which they are lending money to flour millers for wheat procurement would be linked with the treasury bills rate. At present banks charge 12 per cent markup on the money lent for procurement of wheat and for construction of silos by the private sector.

An SBP letter, issued to the banks concerned, reminded the banks that Governor Dr Ishrat Husain had already allowed them to provide adequate funds for the said purposes for up to 5-7 years.

The letter said that such financing should be made at a debt: equity ratio of 60:40 at 12 per cent markup. “The lending rate shall subsequently be made market-based on their linkage with the rate on T-bills,” said the letter without announcing a deadline for this purpose.

Pakistan is committed to linking commodity financing rates to the T-bills rate under an agreement with the IMF.

It is not clear what formula will be adopted for linking wheat financing markup with T-bills rate. Bankers say wheat financing would become cheaper if the markup is linked straight with six- month or one-year T-bills rate without loading it with a certain percentage point.

Export finance rate is set after adding 1.5 percentage point on the weighted average yield of six-monthly TBs.

Flour millers said the SBP chief had promised them in late November last to give them access to bank credit for wheat procurement and for construction of silos at 12 per cent. After some time some banks had started offering credit for this purpose but some were reluctant.

“The letter now issued by the central bank should remove any confusion the bankers had about this issue,” said Shaikh Akhtar Husain, a former chairman of All Pakistan Flour Mills Association.

Present chairman Khalid Masood said the financing for wheat procurement and for construction of silos was well-timed as the wheat sector had enough potential to export wheat and its products. A former chairman Sufi Bilal told Dawn by telephone that more than half a dozen parties had already been exporting small amounts of wheat and wheat products.

Encouraged by a bumper wheat crop, Pakistan recently allowed the private sector to export wheat and wheat products. Flour millers say the country may export three million tons of wheat this season after meeting its own requirement of 20 million tons. The move to allow banks to give liberal credit to the flour millers shall help the flour millers accelerate the export of wheat and wheat products.

But the banks are supposed to play safe while lending money to flour millers.

“The banks would ensure that the transactions (lending) are viable and their exposure is secured adequately,” says the SBP letter.

For this purpose the ministry of food would develop standard models for construction of storage facilities that may be needed by the millers. This will help banks mitigate credit risk of the borrowers.

Further, “the banks should ensure that the storage facility is used at maximum level only for procurement of wheat by the borrowers.”

The SBP says that the wheat storage financing would form part of the mandatory agricultural credit targets assigned to the banks concerned. Five major banks, National Bank, Habib Bank, United Bank, Muslim Commercial Bank and Allied Bank, and Agricultural Development Bank of Pakistan, Federal Bank for Co- operatives and local private banks are participating in wheat financing.

The State Bank has advised all these banks to furnish on monthly basis a separate statement showing necessary details of agricultural financing made for wheat storage facility.

The banks have been advised to furnish every monthly statement by up to 15th of the next month. But there is a one-time relaxation: The first such statement for the month of January may be furnished on or before February 20.