SBP financing for Export refinance scheme

Farkhanda · 01-03-2010, 11:57 PM

In Export refinance scheme, SBP provides financing facility to commercial banks so that they can enhance export financing for their customers.

I have read in a bank's annual report
"As per agreements, the Bank has granted the SBP the right to recover the outstanding amount from the Bank at the date of maturity of the
finance by directly debiting the current account maintained by the Bank with the SBP. "

Does it mean that
SBP gives exclusive financing to banks for export-finance purpose and that it refinances banks if they are short of funds for this purpose?

Plus, i have read in newspapers that export finance rate increased so due to this export REfinance rate also increases?
So what is is the right mechanism? Logically Export finance rates should follow export refinance rates. But according to the above line of newspaper, export REfinance rates are following export finance rates>

What is the right mechanism?

Toronto_Boy · 01-04-2010, 03:54 AM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Farkhanda
 What's the difference b/w export refinance rate and export finance rate?

Is there any incentive for banks as they give subsidized loans to exports under the scheme?

Why SBP increase / decrease export REfinance rate?

<hr height="1" noshade id="quote"></blockquote id="quote">

Practically speaking not much difference between 2 terms. Conceptually speaking yes there is. Refinance is provision of finance on raw material and value added goods that already had finance during value addition phase, to facilitate export financing further.

For specific incentives to commercial banks please search further. One could be the difference between spread i.e. the rate at which SBP extends finance to commercial banks and the rate at which commercial banks extends to exporters. However, generally speaking, commercial banks' foreign exchange reserves increase due to export remittances i.e. when exporters get their payments from foreign buyers. Moreover, commercial banks are intermediaries which provide services to clients i.e. exporters and charge fee on services. So, their relationship with clients improve, revenues/deposits/foreign reserves improve. This is the way how banking works. Further, it is also regulatory requirement by Finance Division and SBP from commercial banks in Pakistan to facilitate exporters. So, they work as agent of SBP and Gov't.

Export refinance rate has direct link with SBP's various interests rates which SBP effects due to changing economic conditions and business requirements. To understand it, I would suggest to read about changes in SBPs bank rate.

For further reading, search SBP's export finance scheme or read the material provided by Banking Policy and Regulations Department (BPRD) and Banking Inspection Department.

I hope it helps.

Toronto_Boy · 01-06-2010, 01:42 AM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Farkhanda
 In Export refinance scheme, SBP provides financing facility to commercial banks so that they can enhance export financing for their customers.

I have read in a bank's annual report
"As per agreements, the Bank has granted the SBP the right to recover the outstanding amount from the Bank at the date of maturity of the
finance by directly debiting the current account maintained by the Bank with the SBP. "

Does it mean that
SBP gives exclusive financing to banks for export-finance purpose and that it refinances banks if they are short of funds for this purpose?

Plus, i have read in newspapers that export finance rate increased so due to this export REfinance rate also increases?
So what is is the right mechanism? Logically Export finance rates should follow export refinance rates. But according to the above line of newspaper, export REfinance rates are following export finance rates>

What is the right mechanism?

<hr height="1" noshade id="quote"></blockquote id="quote">

Miss Farkhanda

First of all, I would suggest not to delete first post. It breaks the sequence of discussion. If you need further elaboration of previous question, please write 2nd post after reply on previous post. I hope you would not mind.

Now, come to the questions of this post.

It is the requirement by SBP from commercial banks to extend subsidized loans to exporters for eligible commodities/ services for a specific period of time lets say 6 months. The underline reason for export refinance scheme is to make Pakistani exports competitive (or price wise less expensive) so the foreign buyer would buy more of Pakistani goods/ services as compared to buying from other countries like India, Bangladesh, or China. As a result, exporters would earn foreign exchange and through commercial banks, eventually Pakistan would get more foreign exchange inflows. Thus it would improve foreign exchange reserves position of Pakistan.

In first step commercial banks in Pakistan provides finance to Pakistani exporters at for example 8%, and in 2nd step get it re-financed from SBP at for example 6%. Both rates are only an example and are fixed by SBP under export re-finance scheme. Difference of 2% is called spread which is profit (or incentive as per your previous post question) of commercial banks. Commercial banks also charge other regular bank charges (like TT charges, LC opening charges etc.) from their clients (i.e. exporters) which are another source of revenues/ incentives to them.

As I said earlier, this scheme is to boost Pakistani exports and in result to improve foreign exchange earnings of Pakistan by making exports less expensive. Unfortunately, Pakistani banking sector loans have historically been used for many frauds and for many other purposes than those were intended for. Same has been the case with export re-finance scheme. With collusion with commercial bankers, on fake papers some fraud exporters have been getting loans under export finance scheme (EFS) lets say to invest in booming property or stock markets, even in Dubai. Therefore, like all other schemes, SBP has quite intensive regulations to control misuse of finance provisions under EFS. Again, very unfortunately, we are quite skillful in circumvent controls through collusions, bribes, incentives, or pressures.

So, SBP deducts outstanding amount (i.e. principle loan plus interest) from commercial bankâs reserves (which SBP keeps) on date of maturity of loan, no matter commercial bank has received proceeds of exports or not. It is a risk to commercial banks, but it is a control from SBPâs point of view, in order to pressurize commercial banks to perform due diligence before extending finance under EFS. Further, if foreign exchange does not come into Pakistan then SBP awards penalties on banks and even can blacklist such exporter or exporting group.

So, yes refinance provided by SBP under EFS is exclusively for exports of eligible commodities/ services. You may get the detailed list of such eligible commodities/ services for exports from SBP or commercial banks. However, if commercial bank has extended finance UNDER EFS to exporters, then SBP MUST provides refinance to commercial banks with all rules and regulations. It is not the case that SBP would provide refinance to banks only in case of shortage of funds, as you have asked. However, depending upon liquidity position and other factors, banks may or may not provide loans to exporters from their own funds. For example, if a bank has excess liquidity available and exporter does not qualify under EFS, the bank may extend loan to exporter to get whole amount of interest. Otherwise, if bank does not have enough liquidity or exporter qualifies under EFS, then bank may prefer to provide finance under EFS and would earn spread (of interest amount) only.

Regarding newspaper articles or news items relating to economy, unfortunately most of sub-editors, reporters, or writers in our country do not have required breadth and depth of knowledge of economics. So while reporting economic events they provide sub-standard analysis, even many times wrong conclusions. For example, once I read this conclusion by reporter that SBP is working against interest of exporters by increasing re-finance rate under EFS, when the markets had excess liquidity and economy was suffering from severe inflationary pressures. Without realizing objectives of SBP and state of economy, he wrote his analysis to have favor of some disgruntled exporters. However, it was his opinion which may effect laymen but not to people who understand matter in required depth, though it causes unrest among general masses about institutions. Even people say that some reporters have relations and get incentives from whatever pressure groups they relate to. So, do not take every news (specially in Urdu newspapers) seriously but analyze it with your own independent understanding. Also, yes your logic is correct, rate at which commercial banks extend finance to exporters follows the rate at which SBP re-finances to commercial banks. First SBP changes rate and then banks follow the suit.

As I suggested earlier, do not be confused with the terms finance or re-finance. These are established to distinguish between phases of financing. I have already suggested to read about changes in central (SBP) bank rate to control money supply in country and incorporate it with SBPâs EFS. In above example, SBP extends refinance to commercial bank at 6%. Commercial bank provides finance to borrower (i.e. exporter) at lets say 8%. 2% difference is spread. Now, if SBP wants to give easy loans, to effect economic conditions in country, it would reduce re-finance rate to lets say 4% and ask banks to extend at 6%. Thus loans would become cheap to borrowers, they would get more loans, in result money supply would increase, keeping other things constant. SBP can also keep the base rate of 6% same but can ask banks to lower spread to lets say 1%, so the banks would extend finance to borrowers at 7%. On the other hand, SBP would increase base rate (re-finance rate) to lets say 8% and resulting finance rate by banks would increase to lets say 10%, if SBP wants to decrease availability of easy loans to borrowers in order to reduce money supply to effect overall economic conditions, keeping other things constant.

I hope it helps. By the way, I am away from details of various SBP schemes for a long time, and they keep on changing regulatory requirements continuously, so please ignore my lack of knowledge if it appears somewhere. Lot of material is available on EFS like booklets and BPRD/ BID circulars. You may also visit at relevant desk of SBP to have detail understanding. For last many years SBP is directly inducting fresh and qualified blood which has brought some change in its functioning. I hope they would be glad to explain you further.

Regards

maqszaman · 01-06-2010, 04:04 AM

Hi Furkhunda,

Although Toronto Boy has elaborated the issue in much detail with a banking and economic point of view but for the sake of general reader, I would like to add my comment here. In fact Finance rate are part of monetary policy of the govt. through which the govt. controls economic activities of the country. This policy has direct effect on the economic growth in the country. In countries other than Pakistan, Monetary policy is conducted independently by the central bank, thus creates a check and balance on Ministry of Finance. Although SBP is an autonomous body in Pakistan, but it is weird that it conducts its own monetary policy. However, SBP is playing a backbone role in Pakistanâs economy.

The prime objective of the export refinance is to stimulate economic activities of the country through creating easy and economic access to finance to empower companies financially, which are engaged in the export business. Let suppose, a company has Rs.100.00 which it has spent on producing goods and exported them to another country. Now, they have no money to make more goods, and export them. They will have to wait for money to come in, to pay of its creditors, labour etc so that he could buy more raw materials. This is called cash cycle gap. The govt. fills that gap through Export Refinance.
The exports bring foreign exchange to the country and make govt. to pay off its import bills. Thus stabilize the foreign exchange rate of its currency. A wide trade deficit weakens the currency of the country. This is the reason, govt. give some incentive to the exporters and provides financing at a cheaper rate to make them competitive in the international market. On the other hand, these re-finances help economy running and growing internally.

The SBP ensures that the exports bring their foreign exchange back into the country. So it compels the bank to recover the money from the exporters if the proceeds do not come into the country as per LC agreement. Also note that the bank of importerâs country also furnishes a guarantee for the return of the proceeds.
The multiplier effects of this incentive are very complex so I am leaving this discussion here.

Farkhanda · 01-06-2010, 08:00 PM

Thanks a lot, it has proved to be quite helpful

AtifQaisrani · 04-01-2010, 01:21 PM

I have been looking for Export Refinance article for quite sometime but couldn't find any appropriate web to know how it actually works? you guys have honestly satiated my thirst for knowledge. Thanx alot)