Traditionally, trade financing has been the main contributor to a banks’ core income with long-term project financing being not so alluring for them.
But in the last five years, this trend has become more pronounced with the huge expansion in domestic trade.
After remaining depressed in 2011, largely due to devastating effects of the super floods of 2010, domestic trade picked up pace from 2012, offering banks an opportunity to boost lending to the wholesale and retail sectors. The stock of debts to domestic wholesale business has increased from Rs48bn in FY12 to Rs79bn in FY16, according to the latest stats released by the State Bank of Pakistan. Simultaneously, financing to retail sector soared from Rs83bn to over Rs115bn.
Senior bankers attribute this decent growth in domestic wholesale and trade financing to ongoing expansion in domestic trade as well as their ability to finance it via tailor-made banking products and growing use of fin-tech in financial products. “A big rise in currency in circulation also keeps pushing lots of money in least-regulated segments of domestic trade,” says a former central banker.
Wholesale and retail establishments normally are either self- sufficient in finance or go for crowd-financing or other modes of informal borrowings. “But I guess banks have been able to meet financing needs of some of them as well.”
The growing use of internet and smart phones for transferring funds has helped (banks) attract a large number of borrowers, not only in big cities but also in mid-size urban centres
But bankers say that the bulk financing normally goes to only those wholesale and retail traders that are tax-payers. They say that in this segment the government move initiated in FY15 to document the country’s retail sector had an impact on the retail financing of banks.
“Instead of complying with the government’s order to get them registered with tax authorities, they opted to deal in cash to avoid paying withholding tax,” head of trade finance of one of the top five banks told this writer. Now, after the leniency shown by the government in this regard, retailers once again are using banking channels for inland transfer of money thereby contributing to the banking business. “That’s why in FY15 retail financing remained sluggish but then picked up again in the second quarter of FY16 after the government stepped back on the withholding tax issue”.
Bankers say that a slump in export business has had an impact on their financing of export-related local businesses, though wholesale and distribution networks of import houses continue to consume lots of the bank’s money. Besides, trade finance to growing segments of agriculture and manufacturing has also been on the rise. In FY16, for example, banks made net additional trade financing of Rs2.4bn in agriculture and Rs16bn in the manufacturing sector, latest stats show. These figures just represent their financing in the private sector and do not cover bank lending to public sector enterprises.
“When crops are purchased from farmers by a middleman the bank loan given to him is often in the shape of trade finance. Similarly, when distributors of food or household appliances’ industries turn to banks for borrowing, banks offer them trade finance,” explained a head of credit division of a large local bank.
Large banks have rolled out several trade finance products in the last few years, bankers say. And the growing use of internet and smart phones for transferring funds has helped them attract a large number of borrowers, not only in big cities but also in mid-size urban centres. Common features of these products include multiple choices for the borrowers for payment of loan installments, online confirmation and reconfirmation of loan withdrawals and payments etc; a close scanning of such products reveal.
These products cover a vast range of funding and financial service needs of local traders, including cash flow management, running finance, internal letters of credit and guarantees, and receipt repayments.
But one thing that stands out in recently launched trade finance products is that the turnover of the businesses against which the loans are obtained have to be several times the assigned borrowing limit of that product. One bank, for example, requires the borrower’s business turnover to be three times the limit of his borrowing. This is being done to ensure the repayment capacity of borrowers.
Funding of long-term $46bn China-Pakistan Economic Corridor (CPEC) has begun on a limited scale. But bankers say they are still unaware of the components of the CPEC funding: foreign direct investment, debt ratios and guarantees etc. That’s why banks in general have so far not focused on what kind of financial products should be developed just to cater to CPEC project funding needs.
In many a CPEC-related projects, there could be financing arrangements between local and foreign banks.
Once this starts happening, our banks will surely be responding to the emerging financial needs of economic projects and in its run-down there would definitely be room and requirement for development of more products for trading finance, senior bankers say.