SBP’s TERF scheme is in the news again. Reportedly, governor SBP has now agreed to an in-camera briefing for members of the Public Accounts Committee (PAC), rejecting previous demands of the committee which had earlier asked for the full list of beneficiaries to be made public.

Regular readers will recall that the Temporary Economic Refinance Scheme (TERF) was the flagship product under the landmark monetary stimulus rolled out by the central bank at the height of the Covid-19 pandemic, which was equal to Rs 2.1 trillion or 5 percent of national GDP (as per SBP’s own estimates).

The half a trillion rupees worth TERF scheme had several never-before-seen features, including allowable max. loan tenor of 10 years, meaning the markup rate could be locked in for up to a decade, never mind the cyclical tightening and loosening of the monetary policy noose. TERF loans were allowed grace period of up to 2 years on principal repayments, against industry standard grace period of just six months in most LT commercial loans. All this of course, was a at maximum markup rate of 5 percent – fixed for up to 10 years – at a time when the policy rate at 7 percent was itself yielding negative real return, since core inflation during FY21 had averaged above 7.5 percent.

Hindsight is 20-20, and the purveyors of TERF can (maybe) rightfully claim that an unprecedented global pandemic demanded unprecedented policy concessions. TERF was unique in that all industries – and not just export oriented sectors – were for the first time welcomed into the concessionary lending ambit. More importantly, the terms and conditions of TERF scheme were amended several times to expand its scope to BMR and not just greenfield investments or brownfield expansions. In fact, as per BR Research’s conversations with SBP management at the time, private sector’s response to the scheme was lackluster, with requests for only Rs0.6 billion loans received in the first two months – until BMR was also added to the scheme’s scope.

But if hindsight is 20-20, so are warnings. By early 2021, this section had warned that the flow of TERF loans seemed to be excessively tilted towards the textile sector, with close to 45 percent of program lending making its way to the industry. Of this, the greatest share went to the spinning industry, laying waste to scheme’s objective to be industry-neutral and in expanding the scope beyond traditional concessionary lending beneficiaries.

In fact, by Jan 2021, when BR Research published its first review of the scheme, no more than Rs100 billion – or 25 percent – of total TERF loans had been disbursed, indicating that there was still time for SBP to review the terms and conditions of the lending programme. However, despite warnings, SBP paid no heed nor offered any explanation why it had allowed a substantial financing under the program to flow towards the usual suspects.

Today, SBP insists that credit decisions on loans made under the TERF scheme were made independently by commercial banks as per their own risk assessment criteria, with SBP offering no input. That might make sense, but SBP conveniently forgets that all applications under any refinance scheme ultimately make their way to the central bank, without whose final approval the refinance is not sanctioned, and the loans remain on commercial terms.

To date, SBP has offered no explanation as to why it could not set industry-wise limits on TERF loans, to ensure that a few key sectors did not come to dominate the scheme. It is worth noting that lending to textile – specifically spinning industry - under the traditional long-term LTFF scheme (for export-oriented sectors) raged on simultaneously while TERF loans were also being sanctioned. It would have been sensible to limit the scope of LTFF and TERF to mutually exclusive industries; SBP defined no such criteria.

But most importantly, TERF loans defined no per group limits on exposure. Today, TERF loans have come under fire as some major sponsor groups have been disclosed to have benefited from the scheme by obtaining TERF loans under various group entities. Reportedly, the highest per group lending under TERF stands at Rs 32 billion, which is 7.5 percent of total loans sanctioned under the scheme. If 5 other sponsor groups come close to that number, it could potentially mean that one-third of the loans under the scheme possibly went to just six business families.

SBP cannot claim to have no knowledge of aggregate loan flow to each business group, since the central bank goes to great lengths at maintaining sponsor group ownership database. And since all TERF applications were eventually approved by the central bank, it could have easily tried to monitor sponsor-group wise exposure. This section highlighted that risk earlier on, but to no avail or explanation by the central bank.

These criticisms do not determine whether the scheme was good or bad. However, the central bank cannot exclude itself from accountability under the pretext of confidentiality. After all, as Kibor skyrockets to 23 percent, the opportunity cost of loans made at markup rate of 5 percent or lower is paid by ordinary Pakistanis (in the form of lower SBP profits).

Only time will tell whether the TERF scheme will yield dividends. What we know so far is that no impact assessment study has been undertaken by the federal government nor the central bank to assess whether the promised productivity gains under the scheme have begun to trickle in. Most expansions undertaken under TERF are currently facing under-utilization, as liquidity for working capital financing is unavailable. Could the brilliant minds at SBP not predict that by the time TERF capacities come online, the business cycle would eventually invert, sucking up liquidity from the system? Does TERF scheme not bear the responsibility of return of current account deficit during H2-FY22, just as CPEC loans were blamed for financing import boom in a very short period?

It is fair for Pakistanis to demand answers from the central bank’s management, both past and present. Whether it is pertaining to the lopsided benefit flowing to specific industries/sectors, the preponderance of key sponsor groups, or on conducting an impact study over the promised productivity gains. If ordinary public is going to bear the cost of concessionary financing in the form of higher future taxes, do they not even have the right to demand that such schemes have built-in safety valves? SBP could have at least compelled TERF beneficiaries to ensure zero layoffs during the tenor of the loan, or that beneficiary firms pay full salary to their employees. If industry reports from last one year are any guide, none of that is happening.

Any objective criticism of TERF on any other concessional financing scheme is not an indictment of the central bank or its management. In fact, SBP’s leadership during 2019-2022 proved to be the most innovative in the bank’s history, launching commendable market-based initiatives in digitization and tech such as Warehouse Receipt Financing for grain storage and Roshan Digital Accounts to broaden the scope of fixed-income market to non-resident Pakistanis (NRPs). But if public institutions are to make better choices in future, the good must not hide the ugly.

Commercial interests, everywhere in the world, always lobby for more concessions. It is the job of the regulator alone to stand firm and evaluate demands by business groups and industries on merit. And on that front, SBP’s management may not have performed so well after all.