KARACHI, April 27: The State Bank has allowed banks to offer loans to traders and flour millers for the purchase of wheat. The banks have got a free hand to fix interest rates on such loans keeping in view the risk profile of each borrower. The central bank announced this decision through a circular issued on Wednesday, weeks after the procurement of wheat commenced across Pakistan. Officials had earlier forecast to harvest a record 22.2 million tons of wheat this year. Actual output might be a little lower because of the damage done to the crop due to heavy winter rains, but it will still be enough to meet domestic demand.

Food departments of Sindh and Punjab and the Pakistan Storage and Supplies Corporation (Passco) have already started procuring wheat form farmers at an upward revised rate of Rs1,000 per 100 kg. But the private sector is yet to start wheat buying in a big way -— due to non-availability of wheat financing from banks. The State Bank’s permission to banks for offering wheat loans will encourage the private sector to start buying the commodity on a large scale thus improving its supply in the market.

In the absence of aggressive private sector buying wheat prices had crashed below the support price of Rs1,000 per 100 kg, hurting the farmers. As the private sector starts wheat purchases using bank financing, this would result in better returns to the farmers.

On the other hand, with the combined wheat purchases by the food departments and Passco as well as by the private sector, flour millers will get enough supply of the commodity and will be able to slash the prices of wheat flour and its allied products.

Higher wheat prices during the last season in the backdrop of smaller-than-expected crop and hoarding by profiteers had pushed up retail prices of wheat flour and its by-products. That in turn had a chain effect on other food items as well — with the result that inflation kept moving up.

In July-March 2004-05, consumer inflation increased at an average rate of 9.06 per cent against the initial full fiscal year target of five per cent.

The State Bank is now getting more serious in containing inflation. It raised its discount rate by one-and-a-half percentage points to nine per cent on April 11 and increased the weighted average yield on benchmark six-month treasury bills by the same rate to seven per cent on Wednesday. The SBP move to allow banks to start wheat financing supple ments its fight against rising inflation through an aggressive tightening of interest rates.

The SBP circular issued on wheat financing says that the banks will be free “to determine the rate of mark-up” keeping in view “the risk profile of each borrower”.

“As the lending to government agencies for wheat procurement is secured against the government guarantee, it is expected that the mark-up rate for the private sector would be in excess of the rates charged by the banks to the government agencies,” the circular adds. This effectively means that the banks will charge the private sector on wheat financing a mark-up rate higher than nine per cent -— the rate at which they lend to the government agencies for wheat procurement. Senior bankers say given the credit worthiness of the borrowers wheat financing may be made at mark-up rates ranging between 10 and 14 per cent.

The banks offering wheat loans may fix margin requirement “as low as 10 per cent of the value of the wheat stock,” says the circular. “However, the banks shall provide no financial facilities (funded or unfunded to enable the borrowers to meet the margin requirements,” it adds.

Last year, the central bank had imposed a 50 per cent cash margin on wheat financing to discourage the speculators from using cheaper bank loans only to procure wheat stocks and hoard them.

The latest SBP move stopping banks from offering financing facility to enable the borrowers to meet 10 per cent cash margin on wheat financing is also aimed at discouraging the speculators.

The SBP circular says that the wheat loans the banks would now give to the private sector would be repayable by the end of January 2006. It also says that the banks will continue to submit a weekly statement in respect of wheat financing to the private sector.

The central bank has also allowed the banks to give wheat-buying loans to seed processing plants keeping in view their own lending policies and the capacity or production plans of the processing plants.