Long-term financing: State Bank raises lending rates by 150 basis points

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The central bank that maintained its key policy rate at 14% in its last monetary policy decision amid stubborn inflation and government’s failure to diversify its sources of borrowing has raised the lending rates on long-term financing for export-oriented industries by 150 basis points (or 1.5 percentage points) from July 1, 2011.

Under the Long-Term Financing Facility (LTFF), the rates of refinance for all the three different tenors, ie, up to three years, five years and 10 years have been revised upward and the borrowers under this scheme will now have to pay 12.5 per cent for the financing period of up to three years, 12.6 per cent for financing period of over three years and up to five years and 12.7 per cent for the financing period of over five years and up to 10 years.

Earlier, on September 30, 2010 – the day when SBP’s key policy rate was raised by 50 basis points to 13.5 per cent – the lending rates for borrowers under this scheme were 11 per cent, 11.1 per cent and 11.2 per cent.

The central bank had introduced LTFF to facilitate export growth. Under this scheme, the Participating Financial Institutions (PFIs) provide long-term financing of up to 10 years including a maximum grace period of two years, to their borrowers for the import of machinery as well as purchase of locally-manufactured machinery for setting up of export-oriented projects. Rates of lending (service charges) under this scheme are benchmarked with the weighted average yields of three, five and 10-year Pakistan Investment Bonds (PIBs) depending upon the period of financing.

Under the scheme, the central bank provides a bulk of refinance to banks and development finance institutions (DFIs) on their disbursements. With effect from July 1, 2011, SBP will provide the refinance at 11% for up to three years, 10.10 per cent for over three years and up to five years and 9.70% for over five years and up to 10 years. These rates of refinance are higher by 150 basis points as compared to previous rates of 9.50 per cent, 8.60 per cent and 8.20 per cent respectively.

However, the central bank has not made any increase in the spread between rate of refinance and end users’ rate. Under the scheme, Participating Financial Institutions’ spread has been maintained at 1.5 per cent, 2.5 per cent and three per cent for financing periods of up to three years, over three years and up to five years and over five years and up to 10 years respectively.

Moreover, the central bank has raised the lending rates for financing under the Scheme for Financing Power Plants Using Renewable Energy by 20 basis points with effect from July 1, 2011.

The rates of service charges (lending rates) under the scheme have been fixed at 10.1 per cent for financing up to five years and 9.7 per cent for over five years and up to 10 years. Banks and DFIs have been allowed to charge 2.5 per cent and three per cent spread respectively for these tenors. Thus, end users’ rate for these tenors will be 12.6 per cent and 12.7 per cent respectively.

Earlier, on December 1, 2009, when the decision to provide financing for the establishment of new power projects using renewable energy with a capacity of up to 10 megawatts was taken, the end users’ rates under this scheme were 12.4 per cent and 12.5 per cent.

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