KARACHI, Nov 29: The State Bank on Friday said it has reduced the export refinance rate by one percentage point to 5.5 per cent for December 2002.

A SBP circular issued to all banks said that the banks would charge a maximum spread of 1.5 per cent over this rate.

This means that the exporters will get export loans from the banks at 7 per cent in December. In November banks were offering export loans at 8 per cent as export refinance rate was at 6.5 per cent.

The cut in the export refinance rate is in line with the 1.5 per cent reduction in the State Bank discount rate and six-month T-bills rate announced earlier this month. The SBP after keeping its monetary policy stance unchanged for nine long months, eased it on November 16, by making a one percentage point cut in its discount rate. Then on November 27, it cut the yield on six-month T-bills by 1.5 percentage points to 4.8 per cent to reinforce the signal that it wants banks to make cheaper credit available to the private sector.

The November 27 lowering of the T-bills rate brought down the weighted average yield of the six-month bills to 5.5 per cent and this automatically became the export refinance rate for December.

Last year the SBP had decided to fix monthly export refinance rate and the rate was tagged with the weighted average yield of six-month T-bills of the preceding month. This was done on the insistence of the IMF as the Fund believed that tagging export refinance rate with the T-bills rate was a must to end what it called interest rate subsidy in exports. The SBP had agreed to this proposition also because being a member of the WTO, Pakistan cannot afford to continue subsidizing exports in any manner that can create problems.

Exporters say the adoption of an expansionary monetary policy stance is good although it seems a bit late. They say that a one per cent cut in the export refinance rate for December is also good and it may help them to some extent. “But the problem is the banks are not ready to pass on the benefit of an easy monetary policy stance to the majority of the borrowers,” says former vice chairman of All Pakistan Textile Mills Association, Mushtaq A. Vohra.

He says that whenever the SBP cuts its discount rate and the T-bills rate the banks lower their lending rates only for a handful of top borrowers ignoring the majority of their clients.

He does not seem off the mark. The banks made a net reduction of less than one per cent in their weighted average lending rate in response to a five percentage points cut rate in last fiscal year. This clearly shows that the banks were indeed very selective in making cheaper credit available to their clients. But bankers say they cannot make an across-the-board cut in their lending rates because this may increase the volume of bad loans; hit their profitability and again make it difficult to cut lending rates. Bankers say it is just logical in the banking business to see the credit profile and judge the credit risks involved before lowering the lending rates for a certain client.

They say whereas the majority of the borrowers are getting finance at around 12 per cent they are now ready to lend at 7 per cent to selected clients with strong credit credentials and business prospects. Businessmen do not challenge this statement.

Many exporters say the one per cent cut in export refinance rate is not of much significance now as they are already getting foreign currency loans for exports at 3.5-4 per cent. A foreign currency loan at this rate becomes all the more attractive as the gradual strengthening of the rupee makes it cheaper over a period of time. But here again some leading exporters, including Mushtaq A Vohra, say that the banks refuse to give foreign currency loans to the majority of their borrowers. “Even if this loans is meant for 100 per cent use in exports, the exporters are denied of it if any of the companies in the business group they own carries a non-performing loan.”

“Blocking loans including those in foreign currency in cases where one of the sister companies are on the list of CIB (Credit Information Bureau) has become very common,” he complains. The State Bank officials say the SBP has already issued a letter to all the banks instructing them not to block credit lines to their borrowers only due to the fact that any of their group companies are on the CIB list.