KARACHI: The Ministry of Finance has made an offer to banks to convert Rs 283 billion of Term Finance Certificates (TFCs) and Rs 114 billion of loans for commodity financing into long-term Pakistan Investment Bonds (PIBs), it is reliably learnt.
Banks were issued TFCs worth Rs 270 billion to raise liquidity for payment to power and oil sector companies as part of government efforts towards reducing the size of circular debt in the power sector. Another Rs 114 billion of loans are outstanding towards commodity financing.
Fifty percent of PIBs will be of 10-year tenor at the last auction cut-off, while 30 percent will be bonds of 5 year-tenor and the remaining 20 percent of three years. The International Monetary Fund (IMF) has allowed 1.5 percent of GDP additional expenditure to clean up the balance sheet and consolidate its fiscal borrowing.
The State Bank of Pakistan has reportedly agreed to raise the cap on banks PIB holding for Statutory Liquidity Ratio (SLR) from 10 to 15 percent as a carrot with a view to making governmental proposal acceptable. All the local banks, especially the big five network banks have reportedly agreed as PIB is a tradeable paper while the market for TFCs is literally non-existent.
However, some of the foreign banks are showing reluctance to allow conversion of TFCs to PIBs as they need permission from their respective head offices to increase their long-term country exposure. These foreign banks have some legitimate concerns that in case the interest rate rise - their balance sheets could be impaired when they do mark to market of the bond for accounting purposes.
Once the TFCs are converted into PIBs, banks may be able to offer slightly lower lending rates to private sector as these TFCs were sold at Kibor plus 1.25 percent to the sovereign. Ministry of Finance is said to have worked out the fiscal implications of the proposal.
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