KARACHI, Feb 15: The State Bank has finally lowered the markup on commodity operations from 12 to 9.5 per cent. The new rate will be effective retrospectively from February 1, 2003. The old rate was fixed on April 26, 2000. The central bank has also asked commercial banks to give loans to the private sector for purchase of wheat on a market-based rate linked with treasury bills rate.

The SBP announced the twin decisions through a circular issued here on Saturday.

Under commodity operations, banks lend money to state-owned agencies for procurement of agricultural commodities as well as inputs on behalf of the government. In 2000, the State Bank also allowed banks to give loans to the private sector for purchase of wheat. This was done to create an enabling environment for wheat exports.

Banks started giving loans for wheat buying initially at the same rate of markup applicable on commodity operations i.e. 12 per cent. The next year the State Bank was asked by the IMF that the markup on wheat loans to the private sector should be linked with the treasury bills rate. But SBP showed no hurry in doing this for reasons best known to them although the benchmark six- month T-bills’ weighted average rate has fallen to 3.2 per cent from 7.2 per cent in April 200 when the banks were allowed to give wheat loans to the private sector.

Now the central bank has fulfilled its commitment with the IMF by asking the banks to price wheat loans at a marked-based rate. Since the SBP has not explicitly said how much spread the banks may charge over the treasury bills rate the banks are apparently free to charge any margin over T-bills rate. Senior bankers say they will take the six-month T-bills rate as the benchmark for this purpose. The six-month T-bills rate is currently below 3.5 per cent. “We expect the banks should give us wheat loans at not more than 5-6 per cent,” says a former chairman of All Pakistan Flour Mills Association Akhtar Hussain.

Wheat millers say currently the markup on wheat financing in the private sector vary from bank to bank and from client to client. “Whereas most banks are offering wheat loans at 11-12 per cent I know of at least one miller who is getting wheat loan at 9 per cent,” said regional chairman of the Association Bakht Yawar Ali.

COMMODITY OPERATIONS: Senior bankers say the lowering of the markup on commodity operations from 12 to 9.5 per cent would further reduce the cost of public sector borrowing. The overall decline in lending rates has already reduced the government’s cost of borrowing and enabled it to repay the expensive loans it had taken earlier from the SBP by getting fresh loans from banks at cheaper rates. Under the credit plan for fiscal 2002/03, the government is supposed to make a net retirement of commodity operations loans of Rs3 billion. According to SBP statistics, the government had retired Rs24.8 billion of commodity loans upto January 18 this year. Bankers say total retirement by the end of the fiscal year in June may exceed the target.