BALANCING, MODERNIZATION AND
Pakistan will have to raise Rs. 333 billion where will this
By AMANULLAH BASHAR
Jul 03 - 09, 2000
The major commercial banks and Development Financial Institutions
(DFIs) would soon be offering financing for Balancing, Modernization and Replacement (BMR)
mainly to the textile sector to enable this export oriented sector to be competitive in
the export market.
While the committees constituted by the government for recommending the
mark-up rate for BMR financing, probably on floating rates, the textile experts feel that
the issue of mark up rate should be allowed to decide by the market forces. Since the
textile industry is running without BMR for more than a decade it requires at least Rs40
billion for the current fiscal and an aggregated amount of Rs333 billion during next five
years. These funds are said to be required to stand with the pressures of quota free
market and demands of the choosy international market, said textile experts.
Keeping in view the past record of various segments of the
manufacturing sector regarding utilization of bank funds, the situation demands for
evolving of a mechanism to keep an eye over utilization of the public money under BMR
financing allowed by the government. There were some bad instances in the past that the
financial facilities were misused by a number of manufacturing units on various pretexts.
They generally transfer the funds to their sister organizations, which were originally
meant for BMR purposes.
The banks or DFIs which are being assigned to provide BMR financing are
the custodians of the depositors money. Spending of these finances on any project
which does not pay back properly deprive the depositors of the actual return on their hard
earned money. Hence the situation demands that a fool proof mechanism is required to
protect depositors and the shareholders of the financing sector as the financing is
actually provided by the public and not by the government or any financial institution
from its own resources. The immaculate credit worthiness is the key true growth of
economy. Hence any provision for allowing investors money to any sector requires extra
prudential banking whatever and whosoever the sector requiring the funds.
Being dominated by the privileged class i.e. politicians, feudal and
other influential people; the textile industry has always enjoyed the lions share of
the banking system in Pakistan. It is however unfortunate that the results produced by the
textile sector do not justify to the amount spent on it so far.
Despite availability of locally produced raw material i.e. cotton and
all out support extended by the previous government of Nawaz Sharif who himself diverted
his business interests from Steel Sector (Ittefaq Foundries) towards the textile sector.
However, the industry was unable to break the psychological barrier of $5 billion exports
because the beneficiaries of the banking facilities were not honest for increasing exports
but to fatten their purse with the public money. Although the banks kitties were
kept open for the textile sector right from the early 90s but the facility did not produce
any tangible results rather it culminated into a big financial scam in the banking sector.
Out of the total stuck up loans of the banking sector the largest amount of the defaulted
loan held by the textile sector. It is generally alleged that those who had the access to
the banks loans never bothered to think about repayment of the loans and that was the
reason why they did not mind about the high mark up rates. The huge loans allowed to the
textile sector were neither used for establishment of any new unit or expansion of the
projects. It may be mentioned that not a single new unit has been set up in the country
for the last 10 years.
According to a careful assessment, currently 345 large- scale units are
in operation most of them are spinning units.
The average age of these 345 units, registered with the All Pakistan
Textile Mills Association (APTMA) as its members, is estimated between 17-18 years. With a
few exceptions, no Balancing, Modernization and Replacement (BMR) has taken place in these
units at least for the last 10 years. The reason for this stagnation is stated to be
non-availability of financing for BMR purposes. This is of course a sorry state of affairs
as it amounts to be suicidal for export oriented industries which to face strong
competitions in the export market. BMR provision is of vital importance even for the newly
set up industries especially in a situation of rapid changes of technology around the
world while majority of the existing textile units are based either on second hand
machinery or obsolete technology.
Accepting the textile industry as a priority sector of the national
economy for increasing exports, the present government has however assured to provide all
possible facilities required by the textile sector for boosting textile production and
This assurance was given by Shaukat Aziz, Federal Minister For finance
at a recent meeting held at the State Bank of Pakistan.
Prominent among those who attended the meeting were including Abdul
Razzak Dawood, Minister for Commerce, Dr. Ishrat Hussain, Governor SBP, Heads of Banks and
Financial Institutions and Mohsin Aziz, Chairman All Pakistan Textile Mills Association
and other senior members of the association. The agenda of the meeting was Financing
Requirements of the Textile Industry.
Shaukat Aziz while addressing the meeting emphasized on innovative and
dynamic financial products and services would require to be offered by the banking sector.
The venture capital, leasing to group entrepreneurs as well as Islamic Mode of Financing
to cater to the present and future requirements at all levels of the production chain.
The finance minister has advised the banks to efficiently process
requests for financing and informs the applicant about the decision within the shortest
Agreeing with the point raised by APTMA chairman that value addition is
not limited only to textile made ups but any product that secures a higher price than the
basic product, is value addition.
Shaukat Aziz also urged the textile industrialists that they should
join with local and foreign entrepreneurs bid for purchase of Nationalized banks,
which are soon to be offered for privatization. The minister also suggested that ginning
institute should be established through government and APTMA funding to improve quality of
Speaking on the occasion Razzak Dawood, Minister for Commerce assured
the textile industry that the government would ensure that all hurdles in operations as
well as exports are removed expeditiously. He was of the view that Small and Medium
Enterprise Development Authority (SMEDA) shall also provide advisory support to
entrepreneurs for putting up new projects as well as BMR.
Dr. Ishrat Hussain, Governor SBP while endorsing the need for
implementation of the long term textile policy aimed at to optimize the textile potentials
assured that SBP as well as banks would provide full support to make the textile policy a
He said that all companies, which have not been classified as
defaulters, could freely avail of bank loans for BMR, new projects and working capital
The governor said that if CIB report of one company in a group of
companies shows overdue/default in repayments, other companies of the same group continue
to avail credit facility from Banks. (CIB clearance is not a requirement of Prudential
In order to give transparency to the credit facility and efficient
processing of loan cases, the SBP governor proposed a mechanism in which representatives
of the banks; Textile Association and SMEDA could review and recommend cases of groups or
companies for Financing by the banks.
Mohsin Aziz, Chairman APTMA apprised the finance minister and the bank
presidents that the textile sector is keen to upgrade the production facilities through
BMR as well as by putting up new projects. However, he complained that in spite of the
governments keenness and instructions to the banks, the banks are still very
reluctant and extremely slow in evaluating and deciding upon the financial requirements of
the textile industry.
According to Mohsin Aziz at least $400 million is required for BMR of
the textile industry which should be provided by the banks at the earliest at reasonable
rates of mark up. Chairman APTMA also stressed upon the need for providing financing as
well as governments permission for establishing warehouses and marketing offices in
the major international markets around the world so as to cut down the long delivery time
of textile exports. He also emphasized the need for innovative and flexible approach by
banks while evaluating the funding requirements of the textile industry for BMR and new
According to informed sources, banks and development financial
institutions are currently exploring the possibility of offering finances to textile
sector for BMR projects at a floating interest rate.
They are however yet to finalize their recommendations on this and
other relevant issues and forward the same to the State Bank of Pakistan (SBP). The State
Bank would then evaluate the recommendations before providing its own input in the textile
vision 2005. A long-term textile policy being drawn to prepare Pakistan to compete in a
quota free and restriction free markets by 2005.
The issue came under discussion at a meeting of top executives of four
lead banks including HBL, UBL, NBP and MCB and three development financial institutions
i.e. PICIC, NDFC and Small Business and Finance Corporation.
The participants discussed pros and cons of financing BMR projects of
the textile industry at floating interest rates with a minimum benchmark. They said it was
not clear which debt-raising instrument would be used for determining floating lending
Normally floating rates are worked out by adding certain basis points
over treasury bills but the use of other instruments like a proposed government bond with
tradable coupons cannot be ruled out.
It was felt in the meeting that the need for having a floating interest
rate for financing BMR projects of textile industry over five years for the purpose of
consistency and for keeping banks and DFIs from unnecessary competition.
According to initial projections of textile vision 2005 the textile
sector would need at least Rs333 billion in the next five years of which Rs40 billion is
needed in 2001. Two top-level meetings have already been held at the State Bank under the
chairmanship of Governor Dr. Ishrat Hussain to discuss financial and other aspects of this
Two committees have already been set up one for developing eligibility
criteria for financing and the other for formulating strategies for technical evaluation
and pricing of textile machinery.
The meeting was chaired by PICIC MD Muhammad Ali Khwaja who told that
two committees would submit their reports within fifteen days.
Textile sector honoured
Despite all odds and evens, the textile sector still enjoys the most
important position in the national economy. It has been placed under special focus through
Vision 2005 by present team of the economic managers. In order to make the textile
industry internationally competitive, it deserve a special place in our economic policies.
The much publicized program i.e. Textile Vision 2005 which covers improvement of cotton
quality, project finance, promotional measures, marketing strategies and quota policy is
now in the final stage and shall be announced on August 13, said Abdul Razzak Dawood in
the trade policy announced last week. Before the announcement of textile policy, the
government has taken following steps, which include a) permission to allow export of raw
cotton right from the beginning of the season. b) Setting up of Ginning Research
Institute. c) Reduction of Customs Duty on import of saw gins. d) Amendment in Karachi
Cotton Association bylaws to permit shift from varieties to grades. e) Grading by PCSI at
Ginneries from July 1. F) Withdrawal of excise Duty on import of raw cotton under the
restructuring and redirection envisaged in Vision 2005 and in order for the focus to shift
to the higher value added sector, it has been decided to withdraw with immediate effect
the export finance facility for yarn and gray cloth.
Withdrawal of the export finance facility for yarn, however, has sent a
shock wave among the spinners. Mohsin Aziz, Chairman of APTMA has said that on one hand
the government resolves to provide all facilities necessary for promoting textile exports
of the country while on the other hand it has decided to withdraw the export refinance
facility on all counts of yarn and gray cloth. Mohsin Aziz strongly criticized the abrupt
and complete withdrawal of export refinance facility. According to Chairman APTMA yarn and
gray cloth comprise 42 per cent of the total textile exports of Pakistan. Export Refinance
is a significant incentive tool for promoting export of yarn and gray cloth in
increasingly competitive international markets. He expressed his fears that the sudden and
complete withdrawal of export refinance facility on yarn and gray cloth could jeopardize a
very significant portion of Pakistans Textile Exports particularly when all other
competing countries are offering the same facility on these products at a very low
interest rate. While supporting the government thrust on value addition Mohsin Aziz
insisted that unless new products and new markets for export are sufficiently developed,
the government should not remove the existing equilibrium lest the existing markets share
of Pakistans textile exports could be lost.
While appreciating the government for identification of the textile
industry as the main vehicle for achieving what he called the ambitious export target of
$10 billion for the current fiscal, Mohsin said that APTMA members fully accept the
governments emphasis on value addition as a step in the right direction.
However, until the spadework is done for documentation any abrupt
change in the existing system may prove counter productive. Spadework includes the
implementation towards production and export of value addition item i.e. commercial
spinners of yarn and weavers of gray cloth are provided sufficient funds for establishing
new units for BMR. The abrupt withdrawal of export refinancing facility from low value
added items to high value added items is like letting the bird in hand to go in the hope
of catching the bird in the bush.
The shifting of export refinancing should be gradual in particular gray
cloth, yarn of the fine counts, dyed yarn, lycra etc. which come under the category of
value added items should be allowed refinance till such time that higher value added
production is achieved. The switch over from low value added to high value added should be
gentle, caring and smooth. Any sudden change, like torrential flood in the hilly ravines,
would carry with it good and bad indiscriminately, he remarked.
Whatever the concerns expressed by the textile sector and even by other
sectors for that matter clamouring for incentives has become a feature of our economy.
The time has come to judge what we have taken from the country and what
we have given in return. People are fade up with cliches.
Economy is suffering from huge foreign and domestic debts having a bad
impact on our sovereignty. A vast majority of the people is compelled to live below
poverty line due to non- availability of even level playing ground. Policies of privileges
should come to an end now.