Does SBP have any tricks in its bag?
Let’s set the stage.
Rest of the world entered the Covid-19 pandemic on the back of almost an 11 year bull run.
While in our case
I wasn’t being dramatic. Due to the high 13.25% discount rate, purely to attract hot money (don’t let the fan boys convince you that it was to fight inflation as it was cost push inflation with little or no impact of interest rates on inflation), we were moving towards a recession.
- Credit to private sector declined by whopping 66% in 9MFY2020 on y-o-y basis
- LSM in recession for 6 quarters
- Share of loans to SMEs drops from 9.3% to 8.2%
- High interest rates reduced repayment capacity of borrowers: financing expense touch 80% of gross profits ← companies with thin margins are not in a position to guard against recessionary forces.
- NPLs that had been consistently declining since 2011, when they were 15.7%, had fallen to 8% last year. Due to the high discount rate to attract hot money, the trend reversed with NPLs inching up to 8.6% in 2Q2020
BR, as usual in its TC, decides to brush the reason for it under the carpet. Understandable as they have been blindly supporting the damaging 13.25% policy.
But this is all post-mortem analyses. What lies ahead should be a matter of concern.
The only sector that entered strong in the pandemic was the banks on account of huge profits that the made by lending to government around 13.25%.
Now that the stage has been set, let’s see the moves announced by SBP.
March 12, 2020
It started with the other IMF import, SBP deputy governor Murtaza Syed, launching bazookas from his mouth. Normally I use the term “moonh ki firing” but I believe it doesn’t begin to cover the statements he was making. “Moonh se rocket launching” hence bazooka seems more appropriate.
“Pakistan’s economic fundamentals, however, are strong and resilient enough to bear the shocks, unlike other countries which had been severely hit economically,” he said during an interactive session with businessmen on the impact of coronavirus on Pakistan’s economy at the Federation House
He said Pakistan could convert post-coronavirus situation into an opportunity to explore new markets for increasing exports. “We can hedge oil, buy big stocks,” he remarked.
March 17, 2020
5 days after the aforementioned bluster boast about resilient economy, SBP announces a measly 75bps cut in the interest rate citing declining inflationary pressure.
Anjum Ibrahim isn’t satisfied with this frivolous explanation of declining inflation (the full article is worth a read and linked at the end of this piece).
…what is ironic is that inflation has been witnessing an upward trajectory since the two economic team leaders were appointed in late April early May 2019 as headline inflation in May last year was less than 9 percent and has been steadily rising as per the Pakistan Bureau of Statistics: a little over 11 percent mid September 2019, over 12.5 percent in December 2019 and 14.5 percent mid January 2020. It then began to decline sharply — to over 12.2 percent in February and 10.4 percent in March 2020 or subsequent to the onset of the pandemic. It is unclear whether the decline is due to keeping 27 out of the 51 components of the Sensitive Price Index constant (with lockdown in place it is doubtful if PBS is able to verify this) with a price decline in only 8 items and a rise in 16 items.
The resident IMF representative is also foreseeing double digit inflation in the country.
Teresa Daban Sanchez, IMF Resident Representative, also said that inflation in Pakistan would remain in double digits this year due to inflationary expectations and expected revision in prices.
Makes you wonder why is SBP coming up with these false claims to justify the measly 75bps reduction.
There were also two other facilities in the announcement, which I will come to in a minute. SBP rather the SBP governor goes on a full on media blast announcing this strategy with a banner on SBP website.
It was followed by SBP governor recording a video message announcing the same schemes and sending that video out on whatsapp, twitter and placing it on SBP website.
It feels the policy announcement was less to help the economy and more to market the Governor. Why do I say that? Because the policies were useless and did not justify the marketing blast that came with it. Let’s unpack them one by one:
- 75bps reduction in discount rate: LSM was in contraction for 6 quarters, credit to private sector was already shrinking in good times (pre-Covid19) and companies’ profitability was being wiped out by the high discount rate. A measly 75bps interest reduction will not reverse it.
2. TERF (Temporary Economic Refinance Facility) to stimulate new investment in manufacturing. Hello? Is anybody at SBP using the grey cells that they have been given. When the global economy was growing, SBP killed of the economic activity and now as the global economy is moving towards lockdown and recession, SBP believes that corporates will borrow to set up a manufacturing facility, albeit at 7%. What is their pedigree? Oh wait. Hmm.
3. RFCC (Refinance Facility for Combating Covid-19) aka hospital financing facility at 3% for hospitals to borrow up to Rs.200M to finance only Covid-19 wards/facilities. SBP seems to be living in lala land and is assuming throwing money (loans) at a problem will suddenly build infrastructure.
SBP is assuming (I don’t know why) Covid19 is a profitable business, which it is not. Why would a hospital borrow to establish a Covid19 facility if it is resulting in losses? Running a Covid-19 ward requires additional equipment, expensive PPEs for staff, the patients require very close monitoring, the disease is very taxing on the health care staff and hospitals have no idea if the business will last 5 years that it requires to payback the loan. Assuming a hospital borrows Rs.200million (max limit) to establish a Covid19 facility, the facility needs to generate (profit after paying all expenses and overheads) EBITDA of 3M per month just to pay back principal. If it was a profitable business, then why not. But as the below report from Profit points out, the hospitals are going bust treating Covid19.
Peshawar Northwest, one of the largest private hospital in Peshawar, cut their medical staff salaries, halving the wage bill after Covid 19
In Sind, private sector hospitals reducing wages of paramedic staff by 50%.
True to form, Business Recorder without knowing the ground realities of how banking works, wrote a long editorial praising the aforementioned announcement.
By establishing TERF at the end-user rate of only 7 percent for 10 years with a total size of Rs 100 billion will enable the entrepreneurs to establish new industries and undertake more projects. This will fuel economic activity, promote growth and increase employment opportunities in the country, which is the need of the hour. The RFCC was also urgently required as our hospitals and other medical facilities are not properly equipped to combat the threat of COVID-19. The extension of RFCC would enable setting up of the much-needed requisite facilities to tackle this pandemic. It seems that this step is somewhat late and should have been taken much earlier when this issue acquired the dimension of pandemic. Well, better late than never.
Just read the bold parts. It appears like SBP, the editors at BR have no idea how banking works but can’t help TCing the governor. It would have been useful if the pedigreed governor, his TC staff and editors at BR, before going on a marketing spree familiarize themselves on how commercial banking works. Mark Twain understood it a century ago.
This is aap ka bhai saying the same on March 18
But I believe AKD Research report said it much better than I ever could. They rightfully called the SBP “clueless”, “criminally behind-the-curve” and aptly titled the report as “SBP-bringing a knife to a gun fight” (recommended reading below).
Any way, the businessmen weren’t happy (they never are) at the measly reduction and wanted a larger reduction. As far as I was concerned, such reductions won’t make much of a difference now. Too little too late.
The Profit did a wide ranging survey and asked Asad Zaman about larger rate cuts
Asad Zaman, member of the Monetary Policy Committee of the SBP, said that he thought the SBP did what needed to be done. Regarding the interest rate cut, he said: “Even some economists were arguing that the interest rate needed to be 8%. The interest rate needs to be higher than the inflation rate, for the real interest rate to be positive — for an economist to suggest otherwise is really an outrageous political statement.”
Reza Baqir wanted to please someone (I don’t know who) by cutting rates, as based on the very criteria he uses i.e., of inflation, the cut in the policy rate wasn’t justified. I wonder how the Monetary Policy Committee (MPC) agreed to the rate cut. It turns out, it didn’t.
The sources said two external members of the MPC, Dr Naved Hamid and Dr Asad Zaman, did not attend the meeting but their votes were counted. The central bank spokesman has confirmed this development but said the regulations allowed the MPC to count their votes. “Two of the external members were not present but voted,” said the SBP spokesperson Abid Qamar. He said that “under the MPC regulations, any member unable to attend a meeting can convey his/her vote on the policy decision to the governor which will be counted as part of the decision voting.”
However, it seems that the members are not aware of any such regulations. “To my knowledge a person who does not attend the MPC meeting cannot cast a vote,” said Naved Hamid. The Express Tribune had requested Dr Hamid to comment why he cast his vote when he was not present in the MPC meeting.
This is sad and hilarious. If one parses it, as per SBP spokesperson, SBP governor voted on behalf of absent members as they had conveyed their decision to him. However, members appear surprised, which implies they didn’t convey their decision to SBP governor. This makes you wonder why SBP governor is ballot stuffing for a measly 75bps cut and why is Asad Zaman defending it in Profit interview.
March 20, 2020
One of the rare right decisions taken by SBP of relaxing requirements under various export finance facilities.
By maintaining high discount policy for so long to attract hot money, SBP had almost killed the production sector. My belief was that any steps taken by SBP will not move the needle much.
March 24, 2020
SBP cuts the interest rates by another 150bps bringing the discount rate to 11%.
True to the form, Governor sb releases a video on this occasion again.
And like clockwork, Business Recorder writes a Report TCing the move
The assurance by the SBP that it stands ready to help exporters will give them more confidence to execute their orders and earn the much-needed foreign exchange for their country. The proof of this assurance is a further cut of 150 basis points in the policy rate on 24th March, 2020 after reducing it by 75 basis points on March 17, 2020. However, there is no need to be panicky as the impact of a decline in exports could also be offset by further compression in imports due to low oil prices in the international market.
March 26, 2020
Seasoned bankers decided to advise SBP on next set of measures. This was a surprise as SBP, especially under Reza Baqir, isn’t used to listening to anyone much less ‘collaborating’.
Amid growing concerns about the potential economic impact of the COVID — 19 pandemic, State Bank of Pakistan (SBP) with the collaboration of Pakistan Banks Association (PBA), has announced a comprehensive relief package.
Before I do a brief analysis of the policy measures, let me again quote Mark Twain
- The first three conditions are about relaxing regulatory limits, which will allow banks to lend more. Now if Reza Baqir had read Mark Twain or had a passing understanding of commercial banking, he should have known that banks do not lend in a crisis. Why? Because it is akin to throwing good money after bad. It would have been helpful if the regulatory limits were preventing banks to lend to borrowers but it isn’t the regulatory limits. Banks, being custodian of public’s deposits and answerable to shareholders who demand profits, are not in a business of propping up distressed companies. SBP is delusional with respect to first three conditions. I have excerpted the deluded terms below:
1. will enable banks to lend an additional amount of around
Rs. 800 billion, 2. as a tool to incentivize banks to provide additional loans to retail SMEs and 3. this measure will allow about 2.3 million individuals to borrow more from banks in this time of need.
The last three conditions, listed next, are fine. Probably this is where PBA collaboration was useful.
2. Payment of principal on loans has been deferred by one year. Regulatory criteria for defining defaults has been relaxed. Margin call requirement for borrowing against shares has been reduced.
I had hinted at such measures six days before SBP, in collaboration with PBA, came up with them. SBP could slide into my DMs and I will advise them pro bono without taking credit so that they introduce timely measures that are actually useful. My DMs are open :)
April 3, 2020
SBP extends the relaxation of principal payment condition to SBP’s refinance scheme.
April 6, 2020
SBP revises RCFF (covid19 hospital financing facility)
RCFF: one of the most badly structured policies
SBP wants the facility to be used specifically for the purpose of establishing Covid19 wards and nothing else (see the highlighted section above). As explained earlier, Covid19 is a loss making business as it consumes quite a few resources including PPEs, ventilators, beds and even the lives of medical workers while the payment from patients doesn’t cover the costs. Moreover, people start avoiding the hospital that has Covid19 patients.
Officials attending the meeting told The News that despite the government’s offer that it would bear the burden of coronavirus patients, who would be referred to the private hospitals for treatment, private hospital owners refused to allocate 20 per cent beds (10 per cent for isolation and 10 per cent for treatment), and presented “scores of excuses”, including the unavailability of testing kits and PPE.
From private business perspective, it doesn’t make sense for private hospital to borrow money to set up Covid19 wards as not only the wards are loss making but they cause additional losses by making private patients avoid lucrative elective treatments at hospitals that have Covid19 patients.
Let’s discuss how banks work.
When a bank lends to business, it makes a credit assessment if the business it is financing will be able to pay back the loan. The loan needs to be structured in such a way that the business is able to repay the loan from income. Though the interest rate is low at 3%, the hospital needs to generate a EBITDA of Rs.200M+ in five years to pay back the loan. As the news reports have shown, under the current operating assumptions, hospital will not be able to generate this sort of income from Covid19 wards.
Most of the hospitals in Pakistan are financed by owners from own money and they keep the cash flows undocumented. It is hard for banks to assess repayment capacity of hospital in such an environment. The job isn’t made easier when the bank knows hospital is borrowing for a loss making Covid19 unit.
Finally, banks don’t know much about hospitals as they are not used to financing them. Usually for such projects, banks hire technical consultants that advise the banks on the feasibility of the ward, costs of establishing and running such wards. In addition, SBP wants banks to ensure that the money granted is specifically being used for Covid19. How can a bank ensure that with the exception of opening import LCs of ventilators as everyone now know treating Covid19 patients requires ventilators.
If you want more details on how banks finance projects, you can read the below thread.
April 10, 2020
First let the governor market himself on the SBP website
SBP announces “Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns” (RSPWSWEBC), the name of the facility is so long that even its acronym needs an acronym. Hereafter, I will refer to the facility as RSPW. The core objective of this facility is to incentivize businesses to not lay off their workers during COVID-19 Pandemic.
SBP is allowing companies, which can’t make payroll due lockdown or sales order cancellations, to borrow from banks at 5% to pay wages and salaries of employees and not lay off workers. Let me reiterate what Mark Twain said about banks as SBP wants banks to lend to those companies that are having a hard time paying salaries.
Banks are in the business of making profit by lending money and getting it back with interest. In a pandemic, banks cannot be sure that a company, which is facing order cancellations and cannot meet its wage bill, will be able to pay back the loan. Banks make assessments based on past track records and future viability. In a pandemic, past track record doesn’t count for much.
For example, let’s say a cinema approaches a bank for a loan for paying wages stating that they have been profitable pre-Covid19 and once things return to normal, they will be profitable again and will be able to repay the loan. Not only is pandemic bringing the cinema close to bankruptcy but there is no guarantee that things will return to normal in a few months. Will people go back to cinemas to sit close to each other? Will there be a second wave?
The cinema is just an example but it presents a conundrum to the bank. SBP is just providing cheap refinancing. The commercial bank is taking all the risk. If the loan goes bad or the cinema goes bankrupt ifthings didn’t return to normal quickly enough, the bank will lose the money it lent. Banks are not in the business of lending money for high risk ventures, which a company having difficulty meeting payroll is.
Conversely, SBP expects the company that is having difficulty meeting its payroll will borrow more to keep employees on payroll. If it is a company such as Descon which has large number of government contracts that will restart once lockdown ends, it can borrow from banks to meet payroll.
However, if it is a restaurant which knows it is not coming back after lockdown, why would it want to borrow on personal liability to pay wages?
Or if it is a textile company whose export orders are cancelled, it would not want to take on additional debt to pay the salaries of its employees.
To summarize, RSPW works for companies like Descon or Artistic which are not firing employees. Instead of borrowing on their corporate credit line of say 10% to pay salaries, they can borrow at the RSPW line for 5% and pay salaries.
This only works for companies that have existing credit relationships with the banks. For companies and SMEs that do not have a relationship with banks, banks do not have the capacity to assess them and lend them money (assume a cinema that doesn’t have a banking relationship now approaches a bank to for RSPW to pay wages. Will a bank lend it money? Should a bank lend it money?) If the bank is in a business of making profit and is a custodian of public’s deposits, it will not lend money in a pandemic to a new distressed company.
But let the SBP governor collect accolades by getting a quote tweet from the PM office for this ill structured scheme.
SBP governor lives in an ivory tower. He should be picking up the phone and inquiring why the textile companies or SMEs not borrowing against RSPW or why hospitals aren’t borrowing against RCFF.
April 16, 2020
In a surprise move, holding an emergency meeting of MPC, SBP reduces policy rate by another 200bps to 9%
Domestically, high-frequency indicators of activity―including retail sales, credit card spending, cement production, export orders, tax collections, and mobility data from Google’s recently introduced Community Mobility Reports―suggest a significant slowdown in most parts of the economy in recent weeks.
In light of this reduction in growth and inflation expectations, the MPC decided at its emergency meeting today, to cut the policy rate by a further 200 basis points to 9 percent. This reduces forward looking real interest rates (defined as the policy rate less expected inflation) to around zero, which is about the middle of the range across most emerging markets. The MPC was of the view that this action would cushion the impact of the Coronavirus shock on growth and employment, including by easing borrowing costs and the debt service burden of households and firms, while also maintaining financial stability. It would also help ensure that economic activity is better placed to recover when the pandemic subsides.
The MPC highlighted that this rate cut would complement other measures recently taken by the SBP to support the economy, including concessional financing to companies that do not lay off workers, one-year extension in principal payments, doubling of the period for rescheduling of loans from 90 to 180 days, and concessional financing for hospitals and medical centers incurring expenses to combat the Coronavirus pandemic.
April 22, 2020
SBP revises the RSPW scheme to “introduce further incentives”
Based on feedback from stakeholders, SMEs including vendors and distributors were particularly facing the problem of providing security/collateral. To address this issue, SBP has now allowed banks for providing financing against corporate guarantees of companies in value / supply chain relationship with the borrowers. Moreover, banks have also been encouraged to provide loans without any collateral i.e. taking clean exposure of up to Rs 5 million.
To facilitate the banks further for lending under the scheme, Banks’ exposure under the scheme has been exempted from the per-party or the per-group exposure limits. It will enable them to lend to borrowers that have exhausted their exposure limits.
I don’t know what stakeholders SBP is talking to but did not expect to see such a delusional and tone deaf SBP. Let’s unpack above.
- Banks are encouraged to provide loan without collateral during a pandemic. Let me re-introduce Mark Twain to SBP
2. Companies provide corporate guarantees to vendors/suppliers to enable the latter to borrow.
First, the image below
Second, why would a company offer a corporate guarantee for a non-arms length vendor, taking an additional liability during a pandemic. Let me allow the experts to weigh in on this one.
Makes you wonder what stakeholders SBP continues to talk to.
April 22, 2020
SBP governor made time to give an interview to Bloomberg
Lockdown is mother of all external shocks, says governor
Pakistan is most aggressive central banker globally this year
Pakistan had taken a number of reform steps to bolster its economy before the virus hit and is ready to do more as it heads for a rare contraction, the nation’s central bank governor said.
“We have several areas we are working on, and refining them in light of development,” Baqir said. “It is more appropriate to talk about them once we feel the situation is such that we need to do more.”
You can be the most aggressive central banker but it doesn’t count for much if all your arrows are missing the bulls eye by a mile. The picture in the article
Like clockwork, BR comes TCing
April 22, 2020
SBP asks banks and DFIs to suspend dividend payment for two quarters.
This implies SBP is expecting NPLs to rise due to pandemic and as a precautionary measure is not allowing banks/DFIs to reduce their capital by paying dividends. Nothing wrong with the move to try to keep the banks well capitalized. However, it doesn’t bode well for the optics. On one hand, SBP wants banks to lend to increase lending while at the same it fears that this increased lending may result in higher loan losses. If I was a bank owner, I’d rather not do risky lending and save my capital so that I can pay myself the overdue dividend one the six months restriction is over.
Prudential Regulation Authority (PRA) in UK had already taken a similar decision on March 30, 2020.
3. Exposure for RSPW has been exempted from per-party and per-group exposure limit.
If a company is reaching the exposure limits, the bank is already exposed to the hilt to that company. Would the bank want to take additional exposure to such a company? I don’t know.
April 30, 2020
The force of self promotion is strong in this new and improved SBP.
Not doubting that 700 companies applied for this facility. However, we don’t know whether these companies that applied were planning to fire the employees and didn’t do it just because of this facility. May be they are like Descon that didn’t have plans to fire employees and just want to use the facility to borrow cheaply.
Companies like Gul Ahmed and Nishat Apparel, that have access to banking and this cheap financing, fired their employees without any apprehension.
Despite earmarking of Rs 30 billion by federal government for absorbing default, the banks are refusing to rescue private firms under SBP’s Refinance Scheme using different excuses including weak audited accounts.
The SBP also said that in first two weeks, application from 700 companies worth of Rs 65 billion are being processed at banks and DFIs to protect jobs of more than half a million employees there.
Contrary to these tall claims made by the SBPs, the companies especially small and medium enterprises (SMEs) are facing immense difficulties as they were arranging collaterals and fulfillilng other requirements of the banks but their loan applications are being rejected on grounds of weak audited accounts. Some entrepreneurs who contacted this scribe lamented that there was no justification for strong audited accounts in the prevailing conditions because if the company was in good financial shape there was no need to seek bank loans.
Even with the launch of the Salary Refinance Scheme SBP has not clearly defined eligibility criteria allowing grounds for rejection to loan request by banks like in the past.
One only needs to browse tweets under the above SBP tweet to realize that companies are laying off large number of employees and are either refusing to use the facility or are deemed ineligible to use the facility.
At least what SBP could do is call the 12 textile companies mentioned in the above news report. These textile companies, instead of availing 3% very cheap financing from banks, decided to incur the expense of moving the court to allow them to fire their employees. These are the stakeholders that Reza Baqir should be talking to and asking them why aren’t they using this facility.
May 1, 2020
SBP increases RFCC limit from Rs.200M to Rs.500M
SBP says that 11 hospitals have been approved for Rs.2.2 billion. As I explained above, it does not make sense for hospitals to borrow for Covid-19 facility. Private sectors are against setting up Covid-19 facilities. Banks do not have the capacity to assess if the facility is being set up exclusively for Covid-19.
Assuming my above arguments against the facility do not hold, it is weird that each of the 11 hospitals borrowed the maximum amount of Rs.200 million. Different hospitals will have different cost structures for setting up a facility and will require different loan amounts. Before I forget, Rs.500 million loan requires that the facility should be generating a cash profit i.e. EBITDA of almost Rs.1 crore per month to pay off RFCC. There is no way a Covid-19 isolation/treatment ward will generate that kind of income and that too over a 5 year period.
Unless the hospitals aren’t really borrowing for setting up a Covid-19 facility and just borrowing against their existing cashflows/collateral because the financing at 3% is so cheap. I am all for increasing the health care infrastructure. But then let’s not fool ourselves by calling this a Covid-19 facility and structure it accordingly as a financing facility to increase the health care infrastructure in the country.
May 6, 2020
Realizing that despite tall claims of SBP, SMEs aren’t able to utilize RSPW, Ministry of Finance, presumably after talking to the same stakeholders that SBP has been useless talking to, decides on a risk sharing facility offering to take 40% first loss on principal portion of the disbursed loan.
My guess is anything less than 100% risk sharing will not have the intended effect.
But let me allow the experts to do the talking
I am shocked. Shocked. Not because SBP has rebranded an existing facility but because it has been more than 24 hours and Reza Baqir hasn’t released the video announcing this new facility or updated the banner on SBP website. Still going with this month old one
In the May 8th BR editorial, 8 days after SBP tweet that 700 firms have applied for the RSPW, one can find the hints of TC if one has a jaundiced outlook like mine.
It is not yet clear whether this would ease banks/DFIs risk perception enabling them to begin disbursements or whether this would further delay the process as they would ensure that they have impeccable documentation to submit to the government in the event that there is a default and thereby be eligible for the risk sharing facility.
There are a total of 700 pending applications with banks/DFIs so far to avail of the scheme and the requested amount is 65 billion rupees. There has already been a delay of one week in the payment of salaries by these 700 companies.
The refinance scheme for salaries and wages is a laudable effort by the central bank that has been appreciated by all concerned and is fully supported during the ongoing pandemic. However its success, it appears, may require a nudge or persuasive intervention by the central bank to ensure that it becomes effective without any further loss of time.
Just to give the timelines
- April 10: SBP announces RSPW
- April 22: Further incentives in RSPW
- April 30: SBP tweets 700 applications for RSPW saving 500k jobs
- May 6: Risk sharing facility for RSPW announced and name of the facility subtly changed to Refinance Scheme to Support Employment and Prevent Layoff of Workers RSSEPLW (still a long acronym)
- May 8: Those 700 applications are still pending
- May 9: PIAF Chairman Mian Nauman Kabir observed that not a single branch of any bank, in the provincial capital of Punjab, Lahore, is offering a loan to SMEs on the SBP directives to avoid layoffs
May 8, 2020
SBP announces that TERF facility can be used for Balancing, Modernization and Rehabilitation (BMR)
By way of recap, TERF was originally announced on March 19 to setup new plants. No need to reintroduce Mark Twain or the industrial meme.
As per the SBP circular, borrowers can now use TERF to modernize existing plants to buy NEW machinery against inland LCs or foreign LCs. Cannot be used for buying 2nd hand machinery, land or carrying out civil works. SBP says it has introduced internal and external checks to prevent misuse.
Internal check is that SBP wants a certificate from internal audit department of borrower that facility is being used for purposes described by SBP. External check is a surveyor to confirm that machine has been installed as per original BMR request.
The internal check is useless. Internal audit team reports to the Seth/CEO (though a corporate governance organogram, if it is a listed company, may show it reporting to a board committee) and is paid salary at the pleasure of the Seth. It will sign whatever certificate CEO wants it to sign. As I said, makes you wonder which stakeholders SBP is listening to.
I can understand SBP doesn’t want TERF to be used for buying land but why not civil works. In 2000s, aap ka bhai helped his mamoon reach out to leasing companies for financing a dyeing plant at mamoon’s garment factory. Paramount Leasing approved Rs.10million to buy/import dyeing machines and boiler (stuff was inexpensive in those days). NDLC reached out to us to say that they also have taken a “post facto” approval and we have to take money from them too. Initially we were stressed what are we going to do with so much debt. But it was a blessing in disguise as we had assumed only machine costs. It took us the Rs10 million that NDLC gave us to make the factory ready for the machines. Pipes needed to be installed for water flow and chemicals, storage area and drying area needed to be built for dyed fabrics, gas connection and pipes needed to be procured for the boiler, plus tons of other stuff. The point I am trying to make is that civil works is a huge part of BMR. This is before working capital requirements. Just because you have the setup you cannot start. Chemicals and dyes need to be procured, factory has to be run and electricity, gas, water, sewerage bills need to be made, manpower to man the factory is to be hired and paid before you see a single penny from sales. To summarize, if you are a professional credit officer at a bank, question you will ask is, fine you are borrowing 7% TERF for importing machinery, at what rate and how much will you borrow for civil works and working capital?
But then SBP is saving you all that hard work. It just says that get a certificate from internal auditor and that project is satisfactory to refinance from SBP. But then this is not SBP’s principal on the line. If there is a loss, it will be on banks’ books. Thus, the easiest way for the bank to not make a loss and also keep SBP happy is to lend to the usual corporate “rent seekers” of Pakistan i.e. Nishat, Gul Ahmed, Lucky, etc as banks believe that these borrowers know what they are doing and will repay the loan on account of their long standing relationship (aka name lending) regardless of project economics.
Few years from now, we will be again blaming these “rent seeking” seths for taking all cheap borrowing and not setting up competitive industries and then holding government hostage over subsidies, zero rating, etc etc etc.
See below for nuanced criticism of my criticism.
May 11, 2020
RSPW which was rechristened RSSEPLW on May 8 has now been nicknamed “Rozgar Scheme”. SBP says that it is called Rozgar Scheme in common parlance but I haven’t read or heard anyone refer to the scheme as such.
SBP enhances the limit of financing allowed in RSPW
State Bank will now finance up to 100% of wages and salaries of businesses with average 3- month wage bill of up to Rs500 million (see table below). This can be used for the onward payment of wages and salaries for the months of April, May and June, 2020. Earlier, 100% financing was available up to a wage bill of Rs200 million only. Similarly, for businesses with 3-month wage bill exceeding Rs500 million, State Bank will now finance of up to 75% with maximum financing of Rs1 billion. Earlier, 75% financing was available up to a maximum of Rs375 million and 50% up to a maximum of Rs500 million.
Later on in the press release, SBP mentions that 450,000 jobs in 500 companies are saved due to this forgetting that 11 days earlier, on April 30, SBP had tweeted about saving 500,000 jobs in 700 companies.
While small businesses continue to face challenges utilizing this refinancing
Why? Because SBP is just providing refinancing. The risk has to be taken by the commercial bank. If the loan goes bad, the write off will appear on bank’s books. Thus commercial banks are doing the prudent thing.
May 14, 2020
No announcement here. Just an update that RSPW or the scheme in common parlance known as Rozgar scheme has zero disbursements to date despite more than a month passed since the first version of the scheme was introduced on April 10. In the meanwhile, SBP did press releases how 500k jobs have been saved or 450k jobs have been saved and even tweeted about it as shown above.
Yet for all its novelty, the Rozgar Scheme is in danger of getting bogged down under procedural delays. It turns out that requests have been received from over 1,440 businesses for financing over Rs103 billion so far, meant to support around a million employees, yet no disbursements have been made at all. That is because banks have had little time to prepare Standard Operating Procedures (SOPs) that match their risk profiles. And even if the government acts as a guarantor, it is on the condition that banks take all necessary steps to cover associated risk; hence all the confusion about necessary documentation.
The necessary steps will include banks asking for the maximum collateral, hence making the scheme feasible only for blue chip companies or those that have clean title to good collateral as Meezan Bank seems to be demanding above.
Caveat
I have never stepped inside the corridors of IMF
Further Reading
- Anjum Ibrahim, “Critical appraisal of SBP report”, Business Recorder April 27, 2020
To add to the travails of the poor and the vulnerable, the PBS notes that in December 2019 headline inflation for rural food was close to 19 percent while for urban food it was close to 17 percent. Urban and rural non-food was a little over 10 percent when the PTI took over power in August 2018 with head line inflation at 5.8 percent in July 2018. The next three months’ prices remained sticky at 5 percent and rose to 6.8 percent in October 2018. In April 2019, the rate was 8.8 percent. From thenceforth headline inflation rose to 10.3 percent in July 2019, 12.6 percent in September and 13.07 percent in January 2020. In short, inflation appears to have increased subsequent to the induction of the current economic team and the reason can be attributed to the conditions agreed with the Fund on 12 May 2019 when the staff level agreement was reached.
The central bank linked the discount rate to CPI instead of core inflation (which removes headline inflation components that exhibit large volatility from month to month, week to week, particularly food and energy) and the SBP report claims that “easing of underlying inflationary pressures was not sufficient to arrest climbing head line inflation which was largely food inflation….the policy makers, nonetheless, anticipated only temporary impact of these food supply shocks on the future inflation path and kept the policy rate unchanged….” Such inexplicable logic, linking the discount rate to headline inflation, and then arguing that volatility in food prices was anticipated by the ‘policy makers’ (read the Monetary Policy Committee) prompting them to leave the discount rate unchanged at a high of 13.25 percent. The report further adds that “interest rates also seemed appropriate to the MPC to bring the inflation rate down to the target range of 5–7 percent over the medium term” — yet another inexplicable claim as economic activity continues to be stifled and financing instruments (notably reduced interest rates for specific sectors) on offer by the SBP were “unsuccessful in raising private credit.”
