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Companies that took the TERF facility and what they did with the money Interloop
What they got and what they spent it on:
The major textile player used a facility of around Rs. 1.5 billion TERF and Rs. 47 million as ITERF (Islamic TERF). The company used it to establish a Hosiery Division number 5 and Fabric Dye House with expansion in its Spinning Unit. It took the money from the Bank of Punjab and National Bank of Pakistan. A similar arrangement was made under ITERF secured with MCB for additional capex requirements to be met.
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What it did to employment:
From 2020 to 2021, the number of employees increased from 20,000 to 22,789 and has grown to further 29,524 by the end of 2022. The TERF facility was further utilized by the company with an additional loan being taken in FY 2021-22 as the total facility being utilized went to Rs. 2.7 billion with different banks.
Other schemes:
It has to be noted that the company was already using the LTFF facility given to exporters by the SBP and SBP renewable energy facility as well. Based on the investment made, the company made an EPS of Rs. 2 for 2020 which grew to Rs. 7 for 2021 and to Rs. 13.76 for 2022. The company did see its exports grow from Rs. 33 billion in FY 2020 to Rs. 50 billion in FY 2021 and FY 2022 saw exports grow further to Rs. 84 billion which shows that the TERF facility was successful for Interloop.
Nishat Mills
What they got and what they spent it on:
Nishat Mills used the TERF facility by asking for Rs. 761 from Bank Alfalah, Rs. 843 million from Habib Metropolitan Bank and and Rs. 1.86 billion from United Bank Limited bringing the total of TERF facility being used to around Rs. 3.3 billion. These were used for the establishment of an open end yarn unit and a project of 130 wider width looms to increase production capacity.
What it did to employment:
Based on the facility, the company saw its number of employees increase from 18,558 to 22,935 from 2020 to 2022. The company used this facility further in FY 2022 where it increased its utilization to Rs. 4.8 billion.
Other schemes:
The company was also utilizing the SBP schemes under LTFF for exports and renewable energy facilities. Based on the investments made, it was seen that the company saw its EPS go from Rs. 10 in 2020 to Rs. 16.84 in 2021 and Rs. 29.33 in 2022. In terms of exports, the company saw export sales at Rs. 45 billion in 2020 to Rs. 46 billion in 2021 and Rs. 75 billion in 2022.
Lucky Cement
What they got and what they spent it on:
The company entered into ITERF and TERF agreement with Habib Bank Limited - Islamic, MCB Islamic Bank Limited, Bank Alfalah - Islamic, Faysal Bank Limited - Islamic, Habib Metropolitan BankIslamic, United Bank Limited - Islamic and National Bank of Pakistan under the Temporary Economic Refinance Facility (TERF) by the State Bank of Pakistan. Loans taken amounted to around Rs. 2.6 billion with different banks. The company was also able to get additional facilities under LTFF for exports and for renewable energy facility of SBP. These facilities were used for expansion and establishment of projects by the company.
What it did to employment:
By FY 2022, the company had expanded the use of the facility to around Rs. 4.9 billion. Lucky Cement did not see a huge change in the number of its employees as the company saw its number of employees go from 2,523 in 2020 to 2,542 by 2022. In terms of the EPS, the company earned Rs. 10 in 2020 to Rs. 43.5 in 2021 and Rs. 47 in 2022. In terms of exports, the company saw exports of Rs. 12.3 billion in 2020 to Rs. 13.9 billion in 2021 and Rs. 10.4 billion in 2022.
Ismail Industries
What they got and what they spent it on:
Ismail Industries used this facility with Rs. 242 million from Habib Bank Limited, Rs. 21 million with MCB, Rs. 199 million and Rs. 131 million with Habib Metropolitan and Bank of Punjab respectively. In addition to that, Rs. 442 million from National Bank of Pakistan as TERF and Rs. 43 million under ITERF from MCB Islamic Bank. This brings the total of the facility to around Rs. 1.1 billion. The facility was further increased to a total of Rs. 3.9 billion in 2022. Ismail Industries also utilized the LTFF and renewable energy facility given by SBP in conjunction with the TERF facility.
What it did to employment: have put undue burden on the import bill of the country but once the economy rebounds, it was felt that it will be on the back of these TERF funded investments which will enhance the long term growth of the country. They defend the fact that most of the borrowing was carried out by the textile sector as the industry forms the backbone of the country and would carry out export-led growth for the country in the long run.
In terms of employment, the company had 2,525 employees in 2020 and had 2,718 by 2022. The company saw its EPS go from Rs. 14.5 in 2020 to Rs. 26.7 in 2021 and Rs. 38.4 by 2022. Initially, the exports of Ismail Industries stood at Rs. 4.5 billion in 2020 which increased to Rs. 6.7 billion in 2021 and Rs. 15.1 billion in 2022.
The textile industry benefited most from the program as they were able to expand and upgrade their plants and export to new markets. Supporters of the program do admit that there were inefficiencies in terms of placing and monitoring limits on the borrowing and keeping them sector relevant.
Detractors of the scheme
The detractors of the scheme feel that the program was lopsided and that it primarily failed to achieve the goals it had set out itself. They highlight the fact that most of the loans that were provided under this facility were given to industrialists at the expense of SMEs. This was an inherent flaw in the design of the facility that was provided by the SBP they claim.
The decision making ability to provide the loans was given to the banks themselves after their due diligence was satisfied which meant that the banks would favour established and running businesses over SMEs who had little track record or collateral against the loan they were able to get. The industries which attained most of the funds were textile, sugar, chemical and automobile sector just to name a few which shows that these loans were extended to established industries. The goal of this program was to benefit businesses of all shapes, sizes and industries, however, banks are always going to prioritise loans to bigger established companies. This flaw became apparent as banks were not mandated to follow any sector or size related financing and were given free reign for the decision making process.
Only 7% of the facility was utilised by non-manufacturing industries which amount to around Rs. 10 billion while 45% of the funding went to some form of textile related industry. There are also concerns raised over the fact that SBP had the final right of approval of all the loans granted by the banks and that SBP could have been more vigilant when approving these loans which they failed to do. There are also claims of preference in regards to certain business groups which benefited the most from these loans and SBP could have made sure that this did not happen where business groups were able to crowd out most of the funding for themselves.
The SBP also mandated that these companies did not carry out any downsizing or firing of staff after they took these loans which was not followed through either which shows that the state bank was not looking to implement the rules it had set out itself. There could also have been a system where these business groups or companies could have been taxed higher in later years in order to offset some of the benefits they would have gotten due to the lower rates of interest that was levied on them which was not put into place either.
Long term financing through TERF
Another aspect that has been criticised is the fact that many companies looked to finance their long term projects with these low rates loans and the benefits of which will accrue years into the future.The goal of the facility was to allow for industries and small enterprises to carry out investments without any delay and these projects had to be executed in the short term. The SBP did not place any temporal limitations which meant companies could carry out large scale investment in projects which would take years to complete before providing any economic benefit. As these loans were at low rates and rates were not going to be revised upwards, they could bear the miniscule costs these projects were worth and could take advantage of output in the future.
Capex and no opex
Critics have said that the SBP allowed companies to carry out capital expenditures at low rates, however, operating expenditure financing that is needed by the companies has to be funded by higher rates prevailing in the economy. They state that once the production capacity was increased, there was a need for similar financing to operate the business and use this capacity which was not provided for. This claim can be shot down by the fact that the central bank did mandate the PFIs to “ensure that the working capital facilities in respect of the new project are adequately secured/agreed to, preferably by a financing PFI or one of the member of the consortium, prior to the approval of financing under the facility, so that project does not suffer due to lack of working capital facilities in future.”
The central bank did put into place certain checks which would have meant that operating expenditure of the future could also be met once the capital expenditure had been carried out. Again, mandating PFIs to make sure this financing was available and was carried out at a long term low rate could have been put into place and made sure TERF was successful in the long run. The fact remained that the interest rates grew to 22% which was not foreseen by anyone and once the rates did get so high, there was a lack of liquidity of funds. This led to an increase in capacity of the business which could not be utilised properly. Rather than something that could have been a feather in the cap of SBP, this ended up being a burden with financing being crowded out and the potential benefits of the scheme not being realised fully. However, the SBP did put in measures to make sure operating expenditure was provided for.
Takeaways for TERF
One of the biggest plus points of a scheme like TERF was the fact that it was a long term loan which does not exist in a country like Pakistan. From the government to the private sector, there is little to no scope of a medium term debt or borrowing market where borrowers can borrow for a substantially long time without risk or revision or changes. From the T-Bill market to the unmatured bond and sukuk market, no bank or institution is willing to commit funds for a long term of time. TERF changed this scenario. It was the first time that a loan was being given for a period of 10 years with a grace period of 2 years. This was a game changer for a country like Pakistan where stability is scarce and needed in order to bring some modicum of certainty in the business environment of the country. This was a good aspect that needs to be kept in mind when future facilities or programs are designed.
One huge criticism of the program was the fact that big industrialists and groups had taken over the scheme by procuring most of the loans. This is something that needs to be looked into and SBP needs to develop sector and business related restrictions to make sure that certain elements of the business community do not end up taking advantage of the facility. Banks supplied TERF related financing to the same companies multiple times which benefited only a few groups. The SBP was re- sponsible for refinancing the loans and should have done more in order to make sure the spirit of the facility was honoured. Banks, when given a choice to lend to an established business and SME, will always lend to an established business and SBP should have enforced its own rules and regulations in a better manner to make sure the facility was open to a larger group of people and businesses. The SBP could have asked the banks to apportion a certain amount of loans to SMEs in order to balance the risk of lending to industrialists and that could have been implemented more stringently which did not take place.
Another tweak that could have been made would have been to peg the interest rates of the TERF program to the interest rates prevailing in the market. They could have been set at KIBOR minus a certain percentage which would have meant that once the interest rates would have increased, the interest on these loans would have changed as well which would have lessened the losses on the central bank. SBP provided liquidity in the market by handing out these loans at lower rates and printed money. This ultimately means that the cost of the project could be seen in terms of inflation that was suffered by the country and that cost needs to be weighed when the benefits of the program are counted out. By pegging the interest rates, the bank could have recouped some of its cost and would have been acceptable by industries as well.
The purview of the SBP
The SBP has the power and the authority to investigate the abuses that are being highlighted by the critics and it would have retained the secrecy of the clients with the matter staying between the banks, the central bank and the borrower. Any misuse of the funds can also be recouped from the banks accordingly even if the borrower does not release the funds and this is something that should be looked into to quell the feeling of unfairness that exists in the minds of the critics of TERF. An institution like the SBP should look to investigate claims of abuse and misuse and carry out investigations of these claims in order to alleviate the sense of unfairness that exists around these loans. This is an opportunity for the SBP to save some face for itself and look to investigate the blatant abuses of funds that have been carried out. This would help alleviate the feeling of gouging and helplessness that the people feel and will bring some perception of fairness and shed light on the success of the program itself. The businesses and industries which took money from the government need to be held accountable and even punished. n
