KARACHI, Sept 28: Trading Corporation of Pakistan or TCP is borrowing money from five major commercial banks at a market-based rate for financing import of wheat, using Karachi inter-bank offered rate or KIBOR as the benchmark.

TCP Chairman Mr Masood Alam Rizvi says these banks will lend short term money at three-month KIBOR plus 45 basis points for October-December 2004. The banks include (1) National Bank (2) Habib Bank (3) United Bank (4) Muslim Commercial Bank and (5) Allied Bank.

TCP made short term borrowing from banks for July-September quarter also at market-based rate using three-month KIBOR as benchmark but it could not be learnt how many basis points the banks added to the KIBOR while pricing their loans for the corporation.

The use of KIBOR by banks for pricing loans not only to the private sector but also to state-run entities shows how fast Pakistan's interest rate structure is becoming market-oriented.

In the not-too-distant past, TCP had managed to borrow short term funds from banks at less than 2 per cent because then the banks had used the weighted average yield on six-month T-bills as benchmark and the T-bills rate had hit historic lows. But from February this year, the SBP began to tighten rates to contain inflation and it accelerated the process with the start of the new fiscal year in July. Whereas, T-bills yields are determined by the central bank keeping in a measured way because too much and too rapid increase can hurt growth sentiments, KIBOR is more reflective of the banks' actual cost of funds.

So, when the banks make lending using KIBOR as benchmark, they know they are going to make money. TCP borrowing from banks at three-month KIBOR plus 45bps for October-December means the effective cost of borrowing would be more than four per cent i.e. if the October 1 level of three-month KIBOR is used as benchmark.

Currently three-month KIBOR is around 3.65pc. If it reaches a bit higher level on October 1 or even remain unchanged then the TCP cost of funds would definitely be over 4 per cent.

While pricing their loans to the private sector borrowers, banks some time charge very high spreads over KIBOR depending upon the track record and the financial soundness of the borrower. But when it comes to public sector entities like TCP, banks naturally are inclined to lend money by charging a nominal spread over KIBOR because of zero risk of defaults.

TCP has so far purchased 926,000 tons of wheat with various countries and will buy another 74,000 tons shortly to meet the target of one million tons. Of this more than 80,000 tons wheat has arrived and the rest would come by end of November or by mid-December.

The first batch of 40,000 tons of imported wheat, of Russian origin, came earlier this month and a ship carrying the second batch of 40,400 tons has just reached Port Qasim.

The government is importing wheat through TCP to supplement local supplies of this commodity to check rising wheat and wheat flour prices that pushed up food inflation to 14.35 per cent in the first two months of this fiscal year.

Out of the first batch of 40,000 tons of Russian wheat, Sindh and the NWFP had got 15000 tons each and Balochistan 10,000 tons. But of the 40,400 tons that has just arrived, the NWFP and Balochistan will get 14,000 tons each and Sindh will get 12,400 tons.

TCP chief Mr Rizvi told Dawn that around 320,000 tons of wheat from Australia, Russia and the US would arrive in October that would raise the total arrival to more than 400,000 tons.

He said the remaining 526,000 tons out of the 926,000 tons purchased so far would arrive by end of November or by the middle of December. He said TCP would be floating tenders next week.