LTFF/TERF: what’s changed?

With the conclusion of CY21, the sun has also set on the era of cheap credit bonanza. Monetary cycle is witnessing mean reversion, while disbursement of concessionary financing sanctioned under TERF is also finally peaking. Six months since the publication of its provisional analysis, BR Research re-examines whether the profile of TERF beneficiaries has changed upon conclusion of the scheme.

According to SBP website, loans of Rs 436 billion were sanctioned under the Temporary Economic Refinance Facility (TERF) by end March 2021, when the Covid-era stimulus finally expired. For those uninitiated, long term loans for investment promotion were sanctioned under TERF. Unlike previous similar programs, TERF loans were meant for both BMR/capacity expansion, and new projects.

In a significant departure from earlier investment promotion schemes, the facility targeted all commercial sectors, instead of only targeting export-oriented projects (a prominent feature of the existing Long Term Finance Facility). TERF loans have been extended for a maximum tenor of 10 years (inclusive of 2 years grace), with a maximum end-user rate of 5 percent p.a.

But has TERF been truly inclusive? Unfortunately, SBP does not release facility-wise dis-aggregated data for loans disbursed under LTFF and TERF. Moreover, periodic data disseminated by the central bank only indicates month-end outstanding, instead of facility-wise gross credit offtake. This means that credit off-take data available is net of scheduled repayments against past loans disbursed under LTFF (this is assuming negligible repayments under TERF to-date, considering that sanctioned loans are yet to be fully disbursed, and carry significant maximum grace period of up to 24 months).

So, what does the data indicate? Back in June 2021, incremental loans disbursed under LTFF/TERF stood at Rs 146Bn, which has since grown to Rs 323Bn. Back then, share of manufacturing sector stood at 88 percent of net offtake, which has since increased to 93 percent – from Rs 128Bn to Rs299 Bn. Interestingly, outside of manufacturing sector the largest TERF beneficiary has been information & communication segment (Rs 11 Bn), rather than wholesale and retail trade. Incremental debt extended to retail and wholesale trade during the interim has been negligible, with total net TERF to trading businesses clocking at Rs 6 Bn.

But did the nature of TERF beneficiaries within the manufacturing universe become more diverse? Back in June 2021, two-thirds of credit extended under LTFF/TERF went to textile and wearing apparel segments. This has rarely changed since. In fact, loans to textile and garments industries have more than doubled during the period, from Rs 81Bn to Rs 179Bn at the close of calendar year.

Is this necessarily a positive outcome? Back in June 2021, BR Research had flagged that the concentration of TERF within textile and garments is not a good omen, given that significant concessionary lending to the segment has already been extended under existing export-oriented programs of LTFF and EFS.

Since its inception a decade earlier, long-term loans under LTFF have almost exclusively been extended to textile and garments industry. Given its pre-ponderance in Pakistan’s goods exports, textile’s large share in these concessionary finance programs is unsurprising and - indeed even expected. Hence, upon its commencement, the broad-based nature of TERF scheme was widely hailed as a welcome sign, as it aimed to reverse the perceived ‘premature deindustrialization’ in manufacturing industries other than textile.

Yet, that’s only the tip of the ice-berg. In fact, even within textile, the lion’s share has remained concentrated within low-value add segments of spinning, weaving, and finishing. Even though net credit offtake to textile under TERF has more than doubled between June and December, low-value add industry has maintained its share of over 62 percent (in total TERF to textile). Loans to low-value add industry grew from Rs50 Bn as at June 2021, to Rs108 Bn as at December end. While the share of apparel manufacturers also grew exponentially, it remained at a measly Rs 22 Bn in absolute terms, even lower than the standalone share of cotton-only spinning units.

Here, it may be important to highlight that commercial bank are independent of SBP in make firm-level lending decisions, governed by internal risk-rating guidelines on industry-wise exposure limits, and credit policies which are unique to each bank. However, TERF’s outcome could have looked at least somewhat different, had the central bank issued indicative guidelines advising against sectoral concentration.

Nevertheless, it may be worthwhile to concede that this is most likely an unintended outcome, considering the lag with which sanctioned loan data travels back from various commercial banks to SBP through its administrative arm, BSC, and eventually to SBP’s policymaking divisions. Interactions with commercial bankers indicate that by the time the trend became obvious, most (if not all) applications under TERF may have already been approved.

But that’s in the past. Going forward, one hopes that once loans under TERF are fully utilized, SBP shall finally release disaggregated data reflecting sectoral distribution classified by various indicators such as tenor, rate, loan-ticket size, and region etc.