SBP’s refinance loan portfolio – otherwise known as concessionary lending program – has taken a life of its own over the last decade. Until the late 2000s, refinance loans were primarily extended to export-oriented industries and accounted for no more than 8 percent of total lending to private sector firms (non-financial). Last year, the scale of SBP’s concessionary lending schemes climbed up to 20 percent of total private sector credit, with schemes extending from export refinance to renewable energy, SMEs modernization, agri-produce storage, women entrepreneurship, bill discounting, and one-time lending programs extended during the pandemic to nearly all sectors of the economy.

But as the scale of concessionary refinance reaches unprecedented levels – Rs 1.6 trillion in loans outstanding (or $6 billion) at the close of calendar year 2022 – it is worth asking whether scaling up these development-oriented lending programs has helped achieve stated objectives. In fact, the monetary stimulus extended by the central bank during the pandemic has come under severe criticism by various quarters for building unsustainable momentum – akin to economic growth on steroids - during 2021-2022 that planted the seeds for the still unfolding balance of payment crisis. The IMF too had asked Pakistan’s policymakers to unwind the monetary stimulus as early as in Q1 CY22, reportedly going as far as demanding that the refinance portfolio be phased out of SBP’s umbrella into a special purpose DFI to be established by government of Pakistan. Yet, despite IMF’s objections, a year and a half later, SBP’s refinance portfolio stands strong.

Which raises an obvious question: who are the primary beneficiaries of concessionary lending programs? In this review, BR Research pivots its analysis away from end-consumer borrowers to the intermediary financial institutions – commercial banks and development financial institutions – that make use of the refinance facilities to extend loans to their customers without having to deploy banks’ own capital. Since refinance loans are extended at lower than the market rate, banks’ record additional gains as policy rate climbs. Refinance under nearly all of these facilities (except ERF, which has finally been linked to Kibor beginning CY23) – is extended at a fixed rate ranging between 0 percent to 7 percent maximum.

Thus, the central bank is currently incurring an opportunity loss on markup income at the rate of at least 15 percent per annum - on loans worth nearly a trillion rupees - at a time when Kibor itself has climbed well-above 22 percent. Meanwhile, banks’ are the most obvious beneficiaries, as they enjoy (effectively) risk-free income at central banks’ expense. (Yes, banks bear 100 percent default risk, but why would a borrower default at a loan carrying markup rate of 2 – 5 percent on average, when the alternative is commercial loans priced over 25 percent in case of restructuring).

So, which commercial banks’ have made the most of the refinance facilities? Although SBP allocates refinance limits based on financial institutions’ capital adequacy among other factors, surprisingly, it is the mid-sized banks’ that have made most of the concessionary lending programs. In fact, the largest borrower under refinance lines is Bank Al-Habib, which is only the ninth largest bank by advances on overall basis. In fact, the refinance portfolio of Bank Al-Habib is greater in size than the refinance portfolio of two of the largest banks UBL and National Bank – put together. Similarly, other mid-sized banks’ such as Habib Metropolitan Bank and Bank Alfalah have larger refinance portfolios than all large sized banks (other than HBL).

In fact, banks such as Habib Metropolitan Bank and Summit Bank are so disproportionately dependent on refinance programs that 30 percent of their total advances (net) are refinance loans (which includes all commercial loans including personal loans, and private sector financial and non-financial firms). Similarly, net advances by development finance institutions (DFIs) such as Pak Kuwait, Pak Iran, Pak Brunei, and Saudi Pak also have an over indexed footprint of refinance loans, with average share of refinance loans in total advances at 30 percent.

Although the higher share of refinance lending in total advances by banks such as Al-Habib and Metropolitan might be rationalized as these banks specialize in trade finance, the same explanation cannot be offered in the case of long-term refinance loans. In fact, Bank Al-Falah and Bank Al-Habib also feature among top three beneficiaries of TERF loans, which were industry-blind and extended during the pandemic to incentivize capex investment by private sector firms in the real sectors of the economy. Even more significantly, even smaller banks such as Faysal feature above large banks such as UBL, NBP and ABL in the availing of TERF scheme. Meanwhile, none of the foreign banks avail any refinance schemes (unclear whether ineligible), while foreign owned banks such as Standard Chartered extended nil TERF loans.

The trends in the availment of refinance schemes by the banking industry indicates that the subject requires more analysis, especially considering that largest banks, specialized banks, and foreign owned banks – which otherwise wear the reputation of robust risk assessment functions with pride – acted with (possibly) extra caution in extending refinance loans, especially as a percentage of their total lending portfolios – considering there is a lot more money to be made in refinance based loans, and are also less risky, at least on surface.