Approval of revised lending policy linked to consent of Bakhtiar

The Economic Coordination Committee (ECC) of the Cabinet has linked the approval of revised relending policy with the consent of newly-appointed Minister for Economic Affairs, Makhdoom Khusro Bakhtiar.

On Monday, Prime Minister upgraded the Economic Affairs Division to Ministry of Economic Affairs, by giving it full independence from the Ministry of Finance.

On April 8, 2020, the ECC was informed that the current re-lending policy was approved in 2016 and notified on September 8, 2016 with the provision for revision after three years.

As per the existing relending policy, loans are being passed on to the provincial governments, federal government departments and autonomous bodies/ DFIs on the following terms: (i) provincial governments on the same terms and conditions at which they have been borrowed by the federal government and ERC will be borne by the provinces ;(ii) federal government departments like NLC and CAA for which commercial accounts are maintained @ 9 per cent per annum inclusive of interest rate of 3.90 per cent( Average Borrowing Cost (ABC)+ 3.50 per cent+ admin charges 0.40 per cent)+ Exchange Risk Coverage (ERC) of 5.1 per cent which is charged both on the principal amount and interest amount separately ;(iii) Autonomous bodies/ Corporations @ 12 per cent per annum inclusive of interest rate of 4.25 per cent (ABC_ 3.50 per cent+ admin charges 0.75 per cent) + ERC 5.10 per cent and spread of 2.65 per cent which is charged both on the principal amount and interest amount separately; and (iv) Development Financial Institutions (DFIs) @ 9 per cent per annum inclusive of interest rate of 3.90 per cent (ABC= 3.50 per cent+ admin charges 0.40 per cent) + ERC of 5.10 per cent which is charged both on the principle amount and interest amount separately. The DFIs may, however, charge maximum spread of 3 per cent per annum from the final borrowers as their administrative charges over the rate of 9 per cent per annum.

The erstwhile Economic Affairs Division conveyed two meetings on the issue with the main stakeholders i.e. Finance Division (EF Wing), DPCO and State Bank of Pakistan on September 26, 2019 and January 22,2020.

The technical input i.e. Average Borrowing Cost (ABC) Exchange Risk Coverage (ERC) required for determination of the terms and conditions of the new relending policy have been provided by DPCO and SBP respectively which are as follows - average depreciation of Rs vs dollars for the last five years (FY 15-FY 19) -8.7 per cent, for the last ten years (FY 10-FY 19) - 6.2 per cent and for the last 15 years( FY 05-FY 19) -6.3 per cent.

During the meetings with the stakeholders held at EAD , it was decided that for the purposes of on-lending average depreciation for the last five years may be taken which is -8.7 per cent.

Average borrowing cost has been worked out and provided by DPCO at 3 per cent on the basis of analysis public and publicly guaranteed external inflows received during FY 14/15 and FY/ 18/19.

The following proposals were thoroughly examined, discussed and approved in the meetings of stakeholders held at EAD and subsequently presented and approved by the Minister for Economic Affairs: (i) provincial governments- relending is made on same terms as borrowed by the federal government;(ii) federal government departments like NLC, CAA, etc., same/borrowing terms, ERC will be borne by the borrower and fixed administrative charge at the rate of 0.50 per cent ;(iii) autonomous bodies - same borrowing terms, ECR will be borne by the borrower and fixed administrative charged at the rate of 0.50 per cent and spread 2 per cent and ;(iv) DFI- same/ borrowing terms, ECR will be borne by the borrower, fixed administrative charge at the rate of 0.75 per cent and spread 2 per cent( to be charged by DFIs).

According to the proposal, the stakeholders agreed that relending cost for federal government departments like NLC, CAA, etc., should be increased from 9 per cent to 13 per cent. Of this average borrowing cost should be enhanced to 3.90 per cent from existing 3.50 per cent and ERC be increased to 8.7 per cent from 5.1 per cent, whereas no change has been proposed in fixed admin charges of 0.40 per cent and spread.

An agreement was also reached on 3.65 per cent increase in borrowing cost for DFI from 12 per cent to 16 per cent. Of this, it is agreed to increase average cost from 3.50 per cent to 3.90 per cent, fixed admin charges 0.40 per cent, ERC 8.7 per cent from 5.10 per cent and spread at 2.65 per cent.

For DFI, borrowing cost will be increased from 9 per cent to 16 per cent whereas other rates will be charged at the same rate applicable on autonomous bodies, except spread/ relending profit will be 3 per cent. The DFIs are allowed to charge 3 per cent further spread from their borrowers.

The Economic Affairs Division submitted the two proposals for approval of the ECC. The other terms with regard to default and recovery of all other charges including commitment fee contained in the Relending Policy 2016, 2009 and 1990 would continue to apply.

The ECC directed the EAD to submit the revised relending policy after the approval of new Minister.