SUCCESS STORIES OF AUTO AND HOUSE FINANCING
Encourages financial sector to add engineering sector
By AMANULLAH BASHAR
Sep 06 - 12, 2004
The House Financing and Auto Financing, which responded overwhelmingly, the banking and financial sector will be extending financing facilities to the Locally Manufactured Machinery (LMM) at the mark up rates determined by the market forces.
The policy of opening the doors for the automobile and housing and construction industries have already proved a great success and the two sectors have registered an unprecedented growth rate last financial 2003-04.
The decision to extended financing facility to the local manufacturers of the machinery would certainly help economic growth in multi-dimensions besides paving way for downstream engineering shots and create tremendous jobs opportunities.
The banking Policy Department of the State Bank of Pakistan (SBP) has announced that under the revised scheme for financing LMM, the banks and financial institutions will get refinance from the SBP at the weighted average yield on 6-month treasury bills against their financing to manufacturers of LMM for up to six months.
Against their financing to the manufacturers of LMM for more than six months but up to two years, they will get refinance from the State Bank at the weighted average yield of last two auctions of one-year Treasury Bills.
Where banks and other financial institutions provide financing to purchasers of LMM the rate of refinance will be average of weighted average yields of last two auctions of the five-year Pakistan Investment Bonds. This rate will be determined on annual basis on July 1 each year.
According to policy, the banks and development financial institutions will be free to charge a maximum spread of two per cent on the refinance while pricing their loans to the manufacturers or purchasers of LMM. It may be mentioned that earlier to this policy, the banks were charging a maximum spread of 1.5 per cent.
The repayment period under the revamped scheme has been kept flexible ranging from 6 months to two years for the manufacturers and up to a maximum period of seven and half year for the purchasers of locally manufactured machinery.
The rate of refinance for financing up to six months is two per cent and for financing exceeding six months but up to two years is 2.5 percent for the current financial year.
This leads to calculate that the banks and other financial institutions may charge up to 4 per cent markup on financing up to 6 months and 4.5 per cent on financing for two years.
For the borrowers requiring financing for two to seven and half year they can charge a maximum mark up of seven per cent. The State Bank will be providing refinance against it at five per cent.
More importantly, the rates of finance/refinance on the outstanding amount once disbursed/availed will remain fixed for the entire period of financing provided the borrowers continue to pay the mark up and principal on due dates.
There will be no maximum limit for borrowing under the scheme. But the State Bank suggests that if the borrowing demands exceed Rs300 million it would be prudent for banks and other financial institutions to provide consortium financing to diversify risks.
The banks and other financial institutions would, however, enjoy discretionary powers to decide whether to approve or disapprove the request of the borrowers within two months of the submission of the requests for such a loan facility.
The participating financial institutions in this scheme will be leasing companies, investment banks and modarabas besides the banks and financial institutions. Their approval as a participation financial institution will be linked with their equity base and the rating assigned to them by the rating agencies on approved panel of the State Bank.
The participating financing institutions will be allowed to provide financing facilities for all items of locally manufactured machinery, equipment and accessories used in the approved list of industries. The eligible under this scheme are fisheries/dairy and livestock products, light engineering, marble and granite, gems and jewellery, leather garments, boat manufacturing, local vendors manufacturing parts of automobile, powerlooms/auto/airjet for units to be set up in the power loom clusters being established in different parts of Pakistan, units to be set up in the ceramic clusters being established in different parts of the country, equipments used for cutting and polishing of marble and granite and manufacturing of handicrafts thereof. Financing can be available for setting up units for preservations/packaging of fruits and vegetables, wooden furniture, handicrafts made from wood and other metals.