Survey shows closure of numerous textile mills in Faisalabad region

The textile industry has grown rapidly over the years, but has faced downfall over the last decade with numerous textile mills and industries failing to contribute to the economy of Pakistan and sustain profitability. The textile mills have faced acute power shortage and increase in raw material prices.
A joint survey conducted by International Finance Corporation (IFC) of World Bank Group and State Bank of Pakistan showed closure of numerous textile mills in the Faisalabad region, creating unemployment and shift of customer preference to other South Asian countries, namely India, Bangladesh and China.
The survey showed that the local customers in turn faced shortages of textile merchandise in the market and faced unduly high prices for household commodities. Major challenges proving as a barrier to consistent supply in this industry are increasing prices of raw material, high excise and import duties on raw material and energy crisis. Pakistan Government should launch and approve development of a textiles vision to provide consistent supply of raw materials to revive the textile industry, the report suggested.
According to survey findings, approximately 50 percent businesses operating with total capital of less than Rs 10 million and 65 percent businesses with total assets less than Rs 10 million, reflecting that despite being a capital-intensive business a number of businesses are operating with low initial investment considering their size.
Total assets comprise machinery/equipment, plant/machinery, inventory, land/building and receivables, liabilities constitute trade payables and borrowing for working capital finance. Business related assets include specialised equipment and machinery for the textile industry.
Annual revenue is predominantly between Rs 10 million and Rs 50 million throughout the segment; expenses primarily represent raw material cost, employee and labour cost and interest expenses against borrowings. All businesses display healthy earnings, including some businesses that have experienced growth up to 25 percent. However, selected sample also witnessed 11 percent businesses with losses over the past three years. The identified reason for losses was lack of resources to compete internationally rather than lack of demand for textiles products, whereas a significant 65 percent of businesses reported total earnings of Rs 1-5 million.
These were the benchmark financial ratios calculated on the basis of average value of financial information obtained from the sample of 37 entities in this sub segment. Such ratios would of course substantially vary for different sample sizes for each establishment individually.
Business owners require equipment and civil works for start-up or expansion. The values provided below are susceptible to volatility in market prices. In addition, individual business owners will have distinctive requirements as per their business needs. The statistics are neither comprehensive nor specific, and present only to provide an indication as to the typical requirement for setup or the expansion needs of a small sized business within this segment.
Funds are mostly managed by the owners themselves, whereas large setups have managers, accountants, partners and directors responsible for managing funds. The funds are mainly required for business assets and working capital which is mostly fulfilled by their own personal savings or cash flows from the business. Some businesses also use banks to meet funding needs.
IFC & SBP survey showed that the percentage is relatively higher and encouraging as compared to some other business in Pakistan. Among the fixed assets, finance requirements mainly centered on machinery and equipment of the business. A large number of owners have fully stocked raw materials for carrying out smooth business operations in case of material shortage or unusual hike in prices which leads to the problem of tied up working capital. This issue pertains throughout the year as a minimum level of inventory is to be maintained for uninterrupted business operations.
The segment is generally well aware and exposed to financing and banking products and is keen to obtain financing/lending products and have a more far reaching relationship with banks and financial institutions. The report said that the owners are mostly unaware of any SME segment specific efforts made by the Government of Pakistan. However, some business owners display awareness of loan products offered by banks and have availed the facility of loan products for business funding needs. A large number of business owners use banks to meet banking and business needs availing the facility of business banking accounts.
The segment at large is keen to use financing or loan products to meet funding needs; they also proposed a number of specific loan products for the segment financing needs at large including trade finance services, business credit cards, business overdraft/running finance, trade finance/letter of credit, and equipment financing and leasing facility.
A significant 37 percent of the segment is funded by banks. More business owners can be driven to utilise banking products if they are educated in respect of how these banking products can be best used to manage funding needs.
Business owners cited high interest rates, bank charges, documentation and religious reasons for not applying for a loan. In addition to that, it was also observed that other services such as payroll and cash management/collection are encouraged by the segment, both standing at 42 percent.
Whereas the response for money transfer is also healthy, 17 percent business owners have displayed intent to avail the service. Only 38 percent respondents did not pay for any of the proposed insurance products, which is very encouraging. Also, 30 percent of them are interested in availing proposed insurance products in future. The percentage can be improved by creating more awareness among business owners.
The survey showed that only 5 percent of the segment is currently paying for any advisory service and has demonstrated lack of interest in obtaining advisory services from banks. Significant 28 percent owners are willing to pay for advisory services; majority is of the opinion that banks have experienced staff but would have high charges for such services.
The textile segment can be informed regarding the advisory potential of banks to generate more opportunity and business for banks. The segment is relatively well developed as compared to some of the other businesses operating in Pakistan. The underlying reason is the existence of strong textile manufacturer clusters for more than 25 years now with stable operations; established businesses have generated healthy profits over the years. Businesses in the segment are largely private limited companies, with owners of the segment facing less risk as compared to sole proprietorships. More than one-third owners are operating from owned premises. Though segment is largely organised at national level represented under a strong trade association Aptma, but selected sample demonstrated that one-third of the businesses are not formally registered with any trade union or association, primarily because they relate to small establishments in the unorganised segment. More than 30 percent of the businesses in the segment do not prepare financial statements, whereas only 50 percent of the remaining carry out an audit of financial statements. The ratio of skilled to unskilled workers is very low.
IFC analysis shows that the segment operates in a highly competitive market with a maximum amount of businesses having more than ten competitors. The majority of segment relies on the same suppliers to meet material needs and have a limited customer base. Risks inherent to the segment include; Uneven cash flows; Raw material shortage; Energy crisis; Business uncertainty (shift of demand for textiles to other countries) and Textile Policy issues.
According to the joint report, small and medium enterprises (SMEs) account for approximately 70 percent of businesses in Pakistan and play a major role in spurring economic activity with a contribution amounting to 78percent of non-agriculture GDP of Pakistan, as per State Bank of Pakistan. However, the segment remains largely unbanked, owing to the following impediments:
---- A different risk profile
---- Lack of substantial collateral
---- Conservative approach adopted by financial institutions
---- Lack of awareness and willingness to bank.