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Over the past 12 months, growth in private sector credit off take has turned green on the back of concessionary financing schemes, bringing overall private sector credit to Rs 5.7 trillion, as at May 21. Between May’20 and May’21, outstanding debt against various concessionary financing schemes recorded an increase of Rs 361 billion, resulting in net increase of Rs248 billion in total credit to private sector (as outstanding finance extended at commercial rates declined by Rs 113 billion).

According to the central bank, out of the incremental Rs361 billion, the largest chunk – Rs 146 billion - has been extended under long term LTFF and TERF facilities, while the remainder was absorbed by export refinancing and construction financing facilities. Although popular narrative would suggest that TERF alone is driving the LT credit momentum, it appears that the TERF binge is yet to be fully turbo charged.

Launched in March 2020, Temporary Economic Refinance Facility (TERF) has been widely hailed by private sector as it took the successful model of export oriented LTFF (historically benefiting mainly textile) and extended it to all other sectors of the economy. According to SBP’s own disclosures, TERF finally gained momentum after facility utilization was permitted for BMR purposes (previously restricted to new investments), and maximum end-user markup rate was capped at 5 percent. The scheme has matured as of March 2021, as total sanctioned loans against TERF soared to Rs 436 billion!

However, as of May 2021, cumulative debt outstanding against both LTFF and TERF facilities stood at just Rs350 billion, of which only Rs 146 billion represent the incremental portion. Unless most of the outstanding debt of Rs204 billion against LTFF as of last year has been refinanced through TERF (not permissible), or SBP has stopped issuing fresh LTFF loans, it appears that most of the loans sanctioned against TERF are yet to be disbursed. The TERF exuberance is coming, but it may not be fully here yet.

Moreover, segment-wise profile of incremental LT concessionary finance extended so far shows that the textile value chain has been the primary beneficiary. Nearly Rs81 billion have been disbursed to manufacturers of textile and apparels, which is over half of the incremental Rs146 billion extended under LTFF/TERF. If this represents funds earmarked under TERF, it appears that credit offtake continues to be concentrated among banks’ previously preferred segments.

More surprisingly, the largest beneficiary within textile turns out to be at the lowest end of the value chain, spinning. Until last year, net flow of fresh loans under LTFF to spinning segment had turned negative, as the industry repaid Rs49 billion on net basis. However, of the net Rs81 billion extended to textiles and apparels under LTFF/TERF over last 12 months, an incremental Rs19 billion flowed to spinning, followed closely by weaving at Rs17 billion, and fabrics finishing at Rs 14 billion. Only Rs 5billion have been extended to bedwear and home textile manufacturers, beaten by Rs8.4 billion extended to apparels/readymade garments manufacturers.

Unless SBP’s statistics have clubbed composite textile units under spinning or weaving (due to commercial banks’ MIS reports following outdated classification), the long-sought investment in capacity expansion seems to be directed mainly in the low value add segments of the industry. This may be perfectly normal if the funds are flowing under LTFF scheme as it is in sync with textile industry’s ongoing expansionary business cycle. However, if the investments have been financed under TERF, it raises questions on the promised broad-based impact of the scheme, which is so far not showing in numbers.

Going forward, SBP would do both itself and the analyst community a favour if it shares a scheme-wise breakdown of concessionary loans disbursed under LTFF and TERF, rather than clubbing the facilities together. That would not only bring more transparency on the primary beneficiaries of concessionary financing schemes but will also help showcase whether the investment delivers the expected impact in terms of productivity and output improvements in the targeted industries.


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