National Bank of Pakistan has refused to extend Rs 3 billion Letter of Credit (L/C) facility to Pakistan Steel Mills (PSM) saying that the latter is unlikely to arrange funds to retire facility. According to the NBP, PSM's working capital lines comprised of Rs 2 billion running finance facility and Rs 3 billion L/C facility which stood expired on December 31, 2012.
"The renewal whereof would be based on the financial position of the PASMIC and various other factors which are assessed as per the bank's approved credit and risk parameters," the sources quoted Irtiza Kazmi, EVP/Divisional Head, Corporate Banking - South as saying in a letter to CEO PSM, Major General Muhammad Javed (retired). He said Rs 3 billion L/C facility is secured by first exclusive charge by way of hypothecation over all present and future current assets including stocks and book debts of the company amounting to Rs 4.80 billion and not backed by GoP guarantee.
"The said LC facility was extended by NBP to PMS solely on commercial terms by virtue of which the bank was assured of the availability of funds at the time of retirement of LCs. However the LC was retired by creating Forced Demand Finance (FPADS) time and again, exposing the bank to losses which have neither been appreciated by PASMIC nor compensated to," he continued.
NBP argues that by virtue of the present financial condition, it seems unlikely for PSM to arrange funds for the retirement of L/C under Rs 3 billion L/C facility on timely basis, and there is every likelihood that the LCs would be converted into fund based facilities. Hence, GoP guarantee has been sought for the facility on an on-going basis to avoid any further provisioning.
"We request to arrange a GoP guarantee backed facility and expedite the approval of Rs 2.6 billion Indicative Term Sheet by the Ministry of Finance, enabling NBP to proceed further with partial adjustment of long overdue mark-ups on various finance facilities extended to PSM," he stated.
On the other hand, the CEO argues that the L/C line of Rs 3 billion is of immense importance in restoration of chain of raw material and improvement in operations of PSM. Under the circumstances, the CEO has requested President NBP to order renewal of the L/C facility of Rs 3 billion on the same terms and conditions for a period up to December 31, 2013. Also allow L/C from the same line for import of raw material. The sources said, PSM is unable to pay January salary to the employees due to financial crisis and employees are worried.
When contacted, PMS spokesman Salman Ali said that the management is trying hard to achieve its revival, while facing this liquidity crunch period. He further stated that PSM made the decision of availability of iron ore its top priority which will provide good results. The payment for recent L/C of iron ore is the reason why PSM is facing difficulty in payment of salaries but soon the availability of iron ore next week and introduction of new products for sale this month will help overcome the salary issue, the spokesman concluded.