With monetary cycle undergoing a V-shaped reversal over the last 6 months, it appeared as if the great concessionary credit binge season was over. Not entirely. According to monthly statistics from SBP, March 2022 recorded the largest-ever credit flow to private sector under concessionary LT schemes, i.e., LTFF & TERF!

SBP data reveals that incremental/net credit flow to private sector under long term concessionary credit scheme rose to Rs42 billion during March-22, against average of just Rs20 billion over the preceding 12 months. Monthly credit flow has since dropped to a little under Rs10 billion by April-22, suggesting that the last few delayed disbursementsof TERF may now be nearly over.

Readers will recall that SBP had maintained the policy rate in Mar-22 at 9.75 percent, even as market had anticipated significant increase based on money market activity. It appears that the private sector remained ahead of the curve, squeezing the little remaining juice out of the Covid-era facility right before monetary tightening came full circle.

Since then, SBP has raised policy rate by 400bps, widening average spread between TERF and commercially priced LT loans to 10 percentage points! As of April-22, share of concessionary schemes now stands at whopping 37 percent of total LT credit to private sector, against little over 10 percent just two years earlier.

If April-22 statements are assumed to denote the final tranche of TERF, then net credit flow under the concessionary scheme clocks up to Rs410 billion. This sounds a reasonable estimate considering initial claims by SBP announced total sanctioned loans of Rs436 billion under TERF (after accounting for scheduled repayments under LTFF between April 2020 and April 2022).

Now that the great private sector debt binge is in the past and concessionary credit no longer fashionable at the central bank, it is time to raise (or in BR Research’s case: raise again!) some tough questions regarding the rationale behind TERF. Although this publication was the first to highlight that credit under TERF had predominantly flown to textile segment, SBP didn’t shy from acknowledging the same. In fact, in various presentations, the ex-SBP governor wore credit flow to the industry as a badge of honor, insisting that the segment was finally investing in modernization after more than a decade.

Never mind that between June 2011 – June 2020, gross disbursement of estimated Rs500 billion went to textile sector under the predecessor scheme LTFF (which was meant only for exporters). GoP borrowing may very well have crowded out private sector credit over the last 15 years, but to insist that textile sector was credit-starved is tenuous.

During the pre-TERF era, textile’s share in total private sector borrowing stood at 25 percent, of which one-third was under concessionary schemes. Although textile’s share in total private sector borrowing has remained roughly unchanged, almost half of the borrowing by the industry today is under ST and LT concessionary schemes.

Meanwhile, as the illustration lays bare, TERF did not go far enough to serve segments that had in the past failed to raise debt from commercials banks. Only 7 percent of TERF disbursement went to non-manufacturing industries, with sectors such as utilities, transport, logistics, hospitality, education, health, entertainment etc attracting no more than Rs 10billion combined. Compare this to borrowing under TERF by standalone sub-segments such as spinning, weaving and finishing, which raised Rs30 billion each separately!

But that’s only half of what may have possibly gone wrong with the scheme. As early as end-2020, the central bank became aware of the pre-ponderance of prospective textile firms under sanctioned TERF loans, but did nothing to reverse the tide. Back then, only Rs100 billion out of the eventual Rs400 billion+ were disbursed under the scheme. Even more importantly, while the Bank’s management highlighted the acute dangers of widening current account deficit during FY22 – partly due to machinery imports under the scheme – it did not ask commercial banks to slowdown disbursements.

Unlike LTFF, since TERF loans do not come with export targets, there is little guarantee that the strong expansion by textile shall translate into meaningful growth in forex earnings. Remember, bulk of credit flow to textile under TERF has been concentrated in low value-added segments such as spinning and weaving, which are non-exporting segments. Moreover, as global commodity prices spiral out of control, liquidity risks loom large for textile, which may soon buckle under pressure due to high cotton/yarn and energy prices - as debt servicing of TERF loans also comes due. Meanwhile, if developed economies induce a recession to combat the inflationary pressures now overtaking world economies, the $30 billion export promise by textile may have to wait another decade either way.

The last time private sector went under during 2007-08, it was led by lax credit origination standards adopted by a still relatively nascent commercial banking industry. The great concessionary credit era of 2020-22 was different in that the binge was entirely sanctioned by the regulator. Let’s hope the central bank does not come to regret it.