KARACHI, Oct 13: Two state-run banks have lowered the rate of mark-up from 2.75 per cent to 2.35 per cent on finances availed by the Sindh food department for wheat procurement from growers.

Officials at National Bank and Habib Bank told Dawn the two banks had cut down the mark-up rate for the current quarter i.e. October-December. During the last quarter (July-September) the Sindh food department had managed to secure financing at 2.75 per cent from Allied Bank and National Bank down from 5.75 per cent in the previous quarter.

Head of Retail Banking Group at NBP Shahid Anwar Khan said his bank had agreed on lowering the mark-up but could not specify if the reduced mark-up would apply on fresh financing or for debt swaps. Normally provincial food departments ask banks to quote mark-up rates for financing their wheat procurement operations in a certain quarter — and if they do not need fresh financing they get the benefit through debt swap. In other words they repay old credit lines of other banks secured at a higher rate through the new ones that are cheaper.

A senior official at HBL said his bank was the first to offer the lowest mark-up of 2.35 per cent to the Sindh food department, adding the department had then asked NBP to revise its rate.

An official at the Sindh food department said his department was able to secure the lowest financing from two nationalized banks — 75 per cent of total requirement from HBL and 25 per cent from NBP — through open bidding.

“We invited bids from all the five major banks and selected HBL for they had quoted the lowest rate,” he said, confirming that NBP was later on asked to revise its rate. The department has made it a thumb rule to secure part of wheat procurement financing from NBP being the treasury bank of the government. But it does not sacrifice interest rate benefit while doing so and NBP has to match its mark-up rate with the lowest quoted by any other bank. The official said the department had secured the lowest mark-up of 2.35 per cent on overall credit requirement of Rs6.9 billion.

Wheat procurement by the provincial governments forms part of the State Bank commodity operations and banks are free to charge a maximum mark-up of 9.5 per cent on such financing. But they are of course allowed to negotiate whatever rate at which they find it feasible to lend.

The prevailing low interest rate environment has emboldened the provincial food departments to ask banks to revise their mark-up rates and a cut-throat competition between the banks for employing surplus liquidity leaves them with no choice but to lower their mark-ups. Hence the gradual fall in the rate at which banks are financing wheat procurement by the Sindh food department.

Whereas the Sindh food department officials say that by asking the banks to revise the mark-up rates they made enough saving — HBL officials are celebrating their success in getting business at the lowest rate. “Last time it was ABL and now are we,” said an HBL official, making it a point that quoting the lowest mark-up was a wise move by his bank. But what happens if the interest rates that have already bottomed out take a spike during this quarter? “I do not think of any substantial spike that makes the 2.35 per cent rate look awkwardly low,” said the official, adding “that our bank has so much liquidity like many other banks that making little margins is much better than leaving surplus funds unemployed at all.”

At 2.35 per cent the HBL-NBP mark-up rate for financing wheat procurement looks decent because it is 70 basis points higher than the last cut-off of benchmark six-month treasury bills. On September 18, the central bank had increased the cut-off on six- month bills by 38 basis points to 1.65 per cent and top bankers say no big increase in sight in immediate future. That is why keeping a 70bps spread on risk-free loaning seems to be in line with market rates.

Sindh food department officials say they will use the cheaper lending by the two state-run banks chiefly for debt swaps as wheat procurement has already been over for this season. They say the department has procured more than 319,000 tons of wheat of the new crop adding that it also has enough stocks of previous crops.