Cash margin on sugar financing

State Bank's move to resort to a selective credit control measure to stabilise sugar prices in the local market appears to be a timely decision. In a circular issued on 9th February, 2009, it imposed 50 percent cash margin for financing against sugar stocks and advised all the banks and Development Finance Institutions (DFIs) to fully adjust all existing loans or advances against security of sugar stocks (disbursed before the crushing period of 2008) latest by 31st March, 2009.
Furthermore, loans or advances against fresh stocks (disbursed after the start of crushing period of 2008) should be adjusted by July 31, 2009. Also, any renewal or fresh disbursement of such loans or advances should be made only after a clean-up period of at least one month after the adjustment of previous loan.
The financial institutions were also debarred from financing the cash margin themselves and instructed to monitor the position of pledged sugar stocks with a view to ensuring that the release of pledged stocks results in corresponding reduction in outstanding loans or advances. Besides, all banks/DFIs were required to submit the position of their outstanding loans against sugar stocks on a fortnightly basis to SBP within three days of the end of each fortnight.
However, these instructions would not be applicable to financing facilities provided to Trading Corporation of Pakistan. Looking at the recent trend in sugar prices in the domestic market and a degree of uncertainty about the supply position, the decision of the State Bank to impose cash margin on sugar financing was, more or less, expected.
Such a move by the central bank discourages the hoarders/speculators to build excess stocks of the commodity with the help of bank credit and forces them to unload the stocks in the market to meet the cash requirements of the banks. The process, therefore, generally results in stabilising the prices at a lower level.
During a short period of about 10 days, the price of sugar in the local market had jumped by about Rs 5 per kg from Rs 38 to Rs 43 per kg in retail due to rising demand and reduced supply. Also, there were reports of commodity hoarding with a view to taking undue advantage of the evolving situation. The announcement of the government to import 0.2 million tons of sugar from the international market had failed to dampen the market sentiment.
On top of all this, sugar cartel in the country has a bad track record of cornering and even vanishing the commodity. In such a situation, it was difficult for the SBP authorities to remain indifferent and allow the stockists of sugar to exploit the market at the cost of consumers. However, it needs to be pointed out that ample credit availability could only be one of the factors contributing to the increase in sugar prices.
The rising trend in prices is not likely to abate if international prices of sugar continue to remain high and domestic sugar output falls short of expectations. In that event, government may have to provide subsidy from the budget to keep the prices of basic commodity like sugar within affordable limits.
Also, the State Bank would have to monitor the supply position, price trends, etc, of sugar on a continuous basis in order to adjust the margin requirement in accordance with the emerging situation. Needless to add that sugar industry would resent the measure, citing reasons of lack of credit and the damage it could cause to the smooth running of their business. But looking from a wider perspective, the State Bank action was very much warranted.