KARACHI, July 24: Banks and other financial institutions will now provide financing for locally-manufactured machinery (LMM) under a more market-based interest rates structure.

The SBP's Banking Policy Department on Saturday announced a revamped version of the scheme for financing LMM through its circular No 25. The circular says that banks and other financial institutions will get refinance from the SBP at the weighted average yield on six-month treasury bills against their financing to manufacturers of LMM for up to six months. Against their financing to the manufacturers of LMM for more than six months but up to two years, they will get refinance from the SBP at the weighted average yield of last two auctions of one-year TBs.

Where banks and other financial institutions provide financing to purchasers of LMM the rate of refinance will be the average of weighted average yields of last two auctions of the five-year Pakistan Investment Bonds. This rate will be determined on annual basis on July 1 each year.

Banks and development finance institutions will be free to charge a maximum spread of two per cent on the refinance while pricing their loans to the manufacturers or purchasers of LMM. Before the revamping of the SBP scheme for financing of LMM they were charging a maximum spread of 1.5 per cent.

The repayment period under the revamped scheme has been kept flexible ranging from six months to two years for the manufacturers and up to a maximum of seven-and-a-half years for the purchasers of LMM.

For the current fiscal year, the rate of refinance for financing up to six months is two per cent and for financing exceeding six months but up to two years is 2.5 per cent.

This means that the banks and other financial institutions may charge up to four per cent mark-up on financing up to six months and 4.5 per cent on financing beyond six months but up to two years.

For borrowers requiring financing over two years up to a maximum period of seven-and-a-half years they can charge a maximum mark-up of seven per cent. The SBP will provide them refinance against it at five per cent.

What is more important is that the rates of finance/refinance on the outstanding amount once disbursed/availed will remain fixed for the entire period of financing. But this will be subject to the condition that the borrowers continue to pay the mark-up and principal on due dates.

There will be no maximum limit for borrowing under the scheme. But the SBP suggests that if the borrowing demands exceed Rs300 million it would be prudent for banks and other financial institutions to provide consortium financing to diversify risks.

The circular says that PFIs or participating financial institutions shall decide about the approval or disapproval of the borrowers request within 60 days. The PFIs may include bank/DFI/leasing company/ investment bank or modaraba. Their approval as a PFI will be linked with their equity base and the rating assigned to them by the rating agencies on approved panel of the SBP.

The PFIs will be allowed to provide financing facilities for all items of locally-manufactured machinery, equipment and accessories used in the approved list of industries.

The list of eligible industries that can seek financing from PFIs includes: Fisheries/dairy and livestock products; light engineering; marble and granite; gems & jewellery; leather manufacturers & leather garments; boat manufacturing; local vendors manufacturing parts of automobile; powerlooms/auto/ airjet for units to be set up in the powerloom clusters being established in different parts of Pakistan; units to be set up in the ceramic clusters being established in different parts of the country; equipments used for cutting and polishing of marble & granite and manufacturing of handicrafts thereof.

Financing under the scheme can also be availed of for setting up of units for preservations/ packaging of fruits and vegetables; wooden furniture; handicrafts made from wood and other metals; machinery used for knitwear and hosiery industries; machinery/equipments used in the thermal/hydro power projects (for manufacturers only); machinery required for setting up of flour mills (for SMEs only); machinery used for rice husking units (only in the SME sector); agriculture equipments including water sprinklers; transport equipments excluding cars but including commercial vehicles for business use, manufactured/assembled in Pakistan with at least 50 per cent deletion; and machinery used in the manufacturing of the pulp board, etc.

Financing facilities under the revamped scheme will not be available for trading purposes i.e. the facility will not be available for purchase of machinery for subsequent sale by the supplier.

Further, the financing facility under the scheme will be restricted to the financing for purchase of locally-manufactured machinery for setting up of new projects or BMR of the existing projects.