Increasing commodity financing receivables: Banks dictating harsher terms: TCP

The Trading Corporation of Pakistan (TCP) has accused the commercial banks of dictating unfavourable terms and conditions to finance commodity operations undertaken on the instructions of federal government, official sources told Business Recorder.
Sources said that Allied Bank of Pakistan (ABL), which earlier overcharged commission on letter of credit (LC), opened for import of urea from Saudi Arabia, has agreed to reimburse the amount. "TCP is unable to demonstrate financial discipline owing to increase in its receivables from different government agencies, including federal government. Therefore, it is being dictated unfavourable terms and conditions by the banking consortium, as not many banks are willing to finance the commodity operation of TCP," sources quoted TCP Chairman Anjum Bashir as saying recently in a meeting of the Economic Co-ordination Committee (ECC) of the Cabinet.
In March 2011, the ECC had directed the Ministry of Finance to give a comprehensive presentation on the process and procedure of opening of LCs, and role of banking consortium in consultation with the Ministry of Industries and Production (MoI&P) and TCP Chairman.
Ministry of Finance told ECC in its meeting on April 26, 2011 that it is the prime responsibility of the buyer/customer to negotiate the terms and conditions of financing facility, which is mainly dependent upon previous financially history of creditor/buyer. It was also informed that generally banks charge 0.1 percent to 0.35 percent of the value of letter credit as LC opening commission.
Banks extend funded and/or non funded credit facilities to their clients; banks usually under the funded facility open LCs on behalf of their customers by making lien to the assigned credit limit charge LC opening commission. In the case of TCP, the banks used to charge 0.1 percent as LC commission plus 20 percent cash margin of the value of LC opened during 2005 to 2008.
Thereafter, they started charging 0.25 percent commission, without any cash margin, owing to liquidity crunch faced by TCP. It was further stated that the present arrangement is cheaper as compared to previous practice. LC opened for recent import of urea is non-remunerative as the financial takeout of LC is made by drawing on Saudi Fund for Development (SFD). Under the financing arrangements, TCP will buy commodity from SABIC by establishing an LC, and SABIC will be paid through it. SFD on presentation of shipment documents will inform EAD to record the creation of loan in its books. Hence, the LC opening bank is not extending any financial commitment to the seller in case of non-payment by TCP. Therefore, LC opening commission of 0.25 percent in case of non-remunerative LC appears to be on higher side. The LC for import of urea was opened in February 2011 for $100 million and, accordingly, the bank recorded this in its books. TCP apprised that ABL has agreed to reimburse the charges on the balance of $46.2 million.
TCP, while offering views on the presentation, stated that it is unable to demonstrate financial discipline owing to increase in receivables from different government agencies including federal government. Therefore, it is being dictated unfavourable terms and conditions by the banking consortium as not many banks are willing to finance commodity operations undertaken by the TCP.
TCP Chairman Anjum Bashir stated that the LC opened for import of urea was valid up to December 31, 2011 and, on its request this LC has been curtailed to the present import of urea, and ABL has charged LC commission for $53.8 million (cost of 13 KMZ) and refunded the balance charged of $100 million.