What is lending? What are the mainsectors of lending?Lending: Grant to (someone) the use of (something) on the understanding that it shall be returned Allow (a person or organization) the use of (a sum of money) under an agreement to pay it back later, typically with interest
Strategic Objectives of SBP1- Broadening Access of Financial Services2- Ensuring Soundness of the Financial Sector3- Maintaining Price Stability with Growth4- Exchange and Reserve Management5- Strengthening of Payment Systems
Broadening Access of Financial ServicesOverview SBP in confluence with other stakeholders (government and the banking sector) for financial broadening. Small & Medium Enterprises & Micro Finance, Islamic banking, Housing & Infrastructure financing and agriculture credit were the main areas of focus in its development finance paradigm.
SME Finance Growth engines of any economy due to their ability to create jobs, foster entrepreneurship and to provide depth to the industrial base of the economy 3.2 million business enterprises1 in Pakistan, and SMEs constitute over 99 percent of the aggregate In retail trade, wholesale, restaurants and hotel business SME activity is 53% industrial establishments 20% service provision 22%
Contribution of SMEs (defined on the basis ofnumber of employees) Over 30 percent to GDP 25 percent in export earnings 35 percent in manufacturing value addition
Range of SMEs LoanAccording to a market study conducted by consultants from Bank academia 30.7 percent of SMEs do not have a bank account at all 85 percent do not take any loan from banks 50.5 percent consider it very difficult to get loans from a bank
SBP’s Initiatives for Growth of SMEFinance Issuance of Separate Prudential Regulations for the SMEs, which allow banks/DFIs lending to SMEs with a clean lending limit of Rs.3 millionSME Finance via Downscaling Approach The downscaling approach is designed to provide existing commercial banks with the technical know-how they need in order to be able to disburse loans to very small and SMEs.
Performance of Micro Finance Banks After the Year 2000-01 the formal financial sector was opened to Microfinance Banks (MFBs). The policy allowed institutional diversity as both regulated and non-regulated institutions were allowed to cater to financial services needs of the poor. Recently, SBP developed a strategy for expanding Microfinance outreach, approved by the Prime Minister of Pakistan. This strategy provides Roadmap for expanding outreach from existing one million to three million borrowers by Year 2010.
Export Finance Regime Major avenue for meeting the funding requirements of exporters.Commodity-Wise Position Highest amount (Rs.219.823 billion) was disbursed to the textile sector.
Ensuring Soundness of the FinancialSector Undertaken to Strengthen the Banking System Stability Prescribes significant up-gradation of risk management standards and technological advancement within banks SBP has taken a number of initiatives and issued a roadmap for implementation of Basel-II to ensure smooth transition to the new regime Note: Basel-II Capital Accord provides a comprehensive and more risk sensitive capital allocation methodology
Maintaining Price Stability with Growth Most desirable pre-requisite for growth and has become the primary objective of central banks in industrialized as well as in developing countries since 1990s Avoidance of high and volatile rate of inflation SBP tightened monetary conditions first by raising the Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR) ratios Open market operations and pro-active liquidity management strategy
Exchange Rate & Reserve Management Foreign Exchange Market in the country continued to grow both in terms of capacity and volumes, thus making a valuable contribution to the overall economic objectives of the country On the SBP’s FX Reserve Management front, although foreign exchange outflows including support for oil / commodities and debt amounted to USD 10.9 billion, it were more than off-set by healthy inflows of USD 13.4 billion on account of FDI, Privatization Proceeds, Bond Issuance, Remittances and Market Purchases
Strengthening of Payment Systems Payment Systems and Electronic Funds Transfer Real-Time Gross Settlement System Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) Management of ATM Cash and Downtime Utility Bills Payment through ATMs Performance of Retail Payment Systems E-banking Infrastructure Clearing of Paper Based Instruments
Types of LendingFund Based (Current and fixed assets)Non-Fund Based ( Fee based)Others
Types of LendingFund Based Others Overdraft Lease Finance Cash Credits Non-Fund Based Hire-Purchase Bill Finance Issue of Guarantees Finance Issue of LC Mortgage Loan Demand Loan Deferred Payment Running finance Term Loans Guarantee Retail Loan Closed-Ended Open-Ended Loans Business Loan Loans Corporate Finance Consumer Finance Project finance
What is Fund Based Lending?Introduction: A Fund-based loan is a loan, often for a short term, secured by a companys assets In case of fund based lending bank commits the physical outflow of funds. As such, the funds position of the lending bank gets affected. The fund based lending can be made by the banks in the following forms…
Overdraft A facility provided by the bank to its client, that he can withdraw a limited amount from the bank in excess of his original balanceFeatures: Current Account Application Credit Analysis Short Term Interest Securities Guarantee
Cash Credit A common form of advancing loan in all banks It grants against:- Personal Security Guarantee Clean Cash Secure Cash Finance Finance
Features of Cash CreditSeparate AccountSecuritiesPledgeTerm of FinanceInterest
Bill Finance Bankers purchase and discount Bills of Exchange and so provide loan. Credit the consumer account with the amount of the bill after deducting discount charges.Features: Account Income Customer Margin Bills
Demand Loan Demand loans are short term loans (typically no more than 180 days) Not have fixed dates for repayment Carry a floating interest rate which varies according to the prime rate. Can be "called" for repayment by the lending institution at any time Demand loans may be unsecured or secured.
Term Loan A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Term loans almost always mature between one and 10 years. Short term ( less than 1 ) Medium Term ( 1 to 5 ) Long Term ( more than 5)
Close Ended Loan Cannot be borrowed once they’ve been repaid Make payments on closed-ended loans, the balance of the loan goes down Don’t have any available credit, can use on closed-ended loans Need to borrow more money, would have to apply for another loan Common types of closed-ended loans include mortgage loans, auto loans, and student loans.
What is Non-Fund Based Lending?Introduction: non fund based lending, the lending bank does not commit any physical outflow of funds. As such, the funds position of the lending bank remains intact. The non fund based lending can be made by the banks in two forms. It has two further kinds:- Issuance of Guarantee Issuance of LC
Issuance of Guarantee A loan which is granted on the basis of guarantee given by the third reliable party. Loan can be provided without guarantee if the party is highly reputable. In case of default of the party, the guarantor will be liable to the bank
Issuance of LC A letter of credit is a promise to pay Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what theyve agreed to do Four parties that may involve in the process of letter of credit. A customer, issuing bank, third party(beneficiary),paying bank Issuing bank reserves the right to cancel the LC at any time and the bank will be under no obligation to give a notice of cancellation to the beneficiary
Open Ended Loan Loans that you can borrow over and over. Credit cards and lines of credit are the most common types of open-ended loans With both of these loans, you have a credit limit that you can purchase against Each time you make a purchase, your available credit decreases As you make payments, your available increases allowing you to use the same credit over and over.
What are other modes of Lending? Lease Finance Hire-Purchase Finance Mortgage Loan Running Finance Business Loan Retail finance Corporate Finance Consumer Finance Project Finance
What are other modes of Lending? Bad credit loans A bad credit loan usually refers to a loan offered to a borrower who has a history of poor credit, and can be difficult to obtain at affordable rates Debt Consolidation loans Combine your existing debts into one debt consolidation loan, and you may significantly lower your monthly repayments and reduce the total cost
Bank Lending Some areas or fields in a country depending on its economic condition or government interest are prioritized and are called priority sectors i.e. industry, agriculture. these may further be sub divided Banks are directed by the state bank of the country that loans must be given on reduced interest rates with discounts to promote these fields.
Latest criteria of Lending Agriculture sector gets only 4.9 per cent share of the total loans lent by the banks Corporate sector gains 63.5 per cent Bank’s staff gets 2.3 per cent Consumer financing attains 8 per cent SME gets 9.9 per cent.
Bank Lending Sectors Agriculture Small Scale Industries Small Road and Water Transport Operators Retail Trade Small Business Professional and Self-employed persons Education Housing Finance
Agriculture Sector The role of agriculture in Pakistan economy is of pivotal nature Due to diverse geographical and climatic conditions the country has tremendous potential for growth and development in agriculture Adequate and timely financial assistance to the farmers will improve production potential of agriculture sector in the country.
Agriculture SectorBanks authorized to provide agriculture credit to farmers. SBP does not restrain any bank from providing agricultural credit. However, under the Agricultural Credit Scheme indicative targets are given to 21 banks on annual basis. These include; two specialized banks five major commercial banks and 14 domestic private commercial banks
Conditions for obtaining Agri. LoanApplicationGenuine Farmer/TenantHolder of a NICNot a defaulter of any Bank Financial InstitutionApplicant must produce proper securities / sureties or other collaterals acceptable to the banks
If one brother was declared defaulter, dothe banks provide loan to other brothers? Every individual could be separately considered for grant of loans if he had credit worthiness and separate landed property
Purposes of Agriculture Credit Complete value chain of activities such as production/crop loans i.e. in-puts (seed, fertilizer, & pesticides etc.) Development loans (tractors &tube wells, agricultural machinery / equipments / implements etc.) Corporate farming Marketing Cold storage (godowns) on farm & off farm, silos, processing of crops (other than major crops), fruits & vegetables, grading, polishing, packing, transportation and exports of agricultural goods etc
Why the mark-up rate of Agricultural Credit is higher than the mark-up rate of Commercial/Industrial Credit? In the post financial sector reforms era, banks’ markup rates are not fixed for different sectors Based on their cost structure and risk profile of the borrowers and the sector Required to use KIBOR as a bench mark for determining pricing of their loans
Is there any limit for agriculture financing? No, there is no limit on agricultural loans Loan limit amount is assessed by the ACO/branch manager on the basis of financing appraisal or feasibility report etc
Is there any system/procedure underwhich farmers can get agricultural loans at their doorsteps? Mobile Credit Officers (MCOs) and Agricultural Credit Officers of banks are visiting the farmers regularly to ascertain the credit needs of the farmers and ensure its availability at their doorsteps and also provide technical help for different crops.
Education Sector Though 62 years have been passed and 23 policies and action plans have been introduced yet the educational sector is waiting for an arrival of a savior the allocation of funds for education are very low. It is only 1.5 to 2.0 percent of the total GDP It should be around 7% of the total GDP
Industrial SectorsIT Industry: Pakistan’s IT industry has been rising steadily since the last three years. The total number of IT companies increased to 1306 and the total estimated size of IT industry is $2.8 billion In 2007, Pakistan was for the first time featured in the Global Services Location Index by A.T. Kearney and was rated as the 30th best location for offshoring By 2009, Pakistan had improved its rank by ten places to reach 20th.
Industrial Sectors Cont’dTextiles 3% of United States imports regarding clothing and other form of textiles is covered by Pakistan Textile exports in 1999 were $5.2 billion and rose to become $10.5 billion by 2007. Textile exports managed to increase at a very decent growth of 16% in 2006.
Industrial Sectors Cont’dMining Based on available information, the countrys more than 6,00,000 km² of outcrops area demonstrates varied geological potential for metallic and non-metallic mineral deposits. The discovery of coal deposits having over 175 billion tones of reserves at That in the Sindh province has given an impetus to develop it as an alternate source of energy. Currently about 52 minerals are under exploitation although on small scale. The current contribution of the mineral sector to the GDB is about 0.5%
Industrial Sectors Cont’dSME: In Pakistan SMEs have a significant contribution in the total GDP of Pakistan, according to SMEDA and Economic survey reports, the share in the annual GDP is 40% Small and medium scale firms represent nearly 90% of all the enterprises in Pakistan and employ 80% of the non-agricultural labor force.
Industrial Sectors Cont’dAutomobile industry Pakistan is an emerging market for automobiles and automotive parts offers immense business and investment opportunities. The total contribution of Auto industry to GDP in 2007 is 2.8% which is likely to increase up to 5.6% in the next 5 years. Auto sector presently, contributes 16% to the manufacturing sector which also is expected to increase 25% in the next 7 years Car ownership in Pakistan has risen by 40% per annum since 2001
Industrial Sectors Cont’dCNG industry As of 2010, Pakistan is one of the largest users of CNG (compressed natural gas) in the world. It has provided employment to over 50,000 people in Pakistan Presently, more than 3,000 CNG stations are operating in the country in 99 cities and towns, and 1000 more would be set up in the next two years.
Industrial Sectors Cont’dCement industry In 1947, Pakistan had inherited four cement plants with a total capacity of 0.5 million tons Some expansion took place in 1956–66 but could not keep pace with the economic development and the country had to resort to imports of cement in 1976-77 and continued to do so till 1994-95. The cement sector consisting of 27 plants is contributing above Rs. 30 billion to the national exchequer in the form of taxes
Procedure of lending Activities Covered in the Bank Loans Policy Procedure Assessing Capital Requirements Preparing the Loan Application Applying for the Loan Closing the Loan Loan Service and Reporting Loan Analysis Forms Included in the Bank Loans Policy Procedure Loan Application Checklist Form
Advantages of Bank Lending Competitive Interest rates(as compared to unconventional lenders) Easy availability(because of bank’s profit and depositors of the bank) No need to specify use of the money(in case of personal loans) Speed(within one hour if appropriate documents are available) Credit(businesses using bank loans increase Their stability and credit score)
Advantages Cont’d Growth(in size of business and more profits) Uses(can be used in various dimensions) No need for collateral(in case of personal loans) Good lending terms and relations with the bank(bank facilitates is lending criteria is met properly)
Disadvantages of Bank Lending Borrowers over-borrow(loans should be according to repayment capacity) Prepayment penalty(payment of loan before the stipulated date, charges penalty) Restrictions(good credit history and about the use of debt) Cash flow(decreasing cash flow due to too much borrowing) Possible Delay In Getting the Loan(busy personnel and inappropriate documentation) Not Everyone Qualifies for a Bank Loan(good credit score required)
Disadvantages Cont’d Entire amount not granted(usually 70 or 80% granted) Inflexible( usually in payment terms) Security(lose of security in case of defaults)
STATE BANK OF PAKISTAN CENTRAL BANK OF PAKISTAN 30 July , 2011 National Data Summary Page Real Sector Fiscal Sector Financial Sector External Sector Population Observations Data Category Unit Period of Previous Links at Source Latest data latest data dataReal SectorNational AccountsGross DomesticProduct (Current Million Rs. FY11 18,062,901 14,836,536 FBSPrices)Agriculture Million Rs. FY11 3,698,658 2,978,950 Crops Million Rs. FY11 1,788,676 1,344,994 Livestock Million Rs. FY11 1,802,221 1,533,716 Fishing Million Rs. FY11 61,403 60,347 Forestry Million Rs. FY11 46,358 39,893
Industry Million Rs. FY11 4,323,057 3,577,659 Manufacturing Million Rs. FY11 3,167,947 2,487,069 Mining and Quarrying Million Rs. FY11 431,907 371,233 Construction Million Rs. FY11 396,777 352,530 Electricity & Gas Million Rs. FY11 326,426 366,827DistributionServices Million Rs. FY11 9,085,772 7,509,906 Wholesale & Retail Trade Million Rs. FY11 3,115,906 2,464,342 Transport Storage & Million Rs. FY11 2,132,844 1,846,735Communication Finance and Insurance Million Rs. FY11 649,701 616,116 Ownership of Dwellings Million Rs. FY11 401,687 345,555 Public Administration & Million Rs. FY11 975,296 757,140DefenceCommunity, Social & Million Rs. FY11 1,810,338 1,480,018Personal Services
Gross DomesticProduct (Constant Million Rs. FY11 5,817,406 5,681,531 FBSPrices)-1Agriculture Million Rs. FY11 1,216,523 1,201,945 Crops Million Rs. FY11 509,393 519,132 Livestock Million Rs. FY11 670,743 646,783 Fishing Million Rs. FY11 22,041 21,626 Forestry Million Rs. FY11 14,346 14,404Industry Million Rs. FY11 1,499,360 1,500,345 Manufacturing Million Rs. FY11 1,085,440 1,054,276 Mining and Quarrying Million Rs. FY11 140,971 140,378 Construction Million Rs. FY11 146,169 144,985 Electricity & Gas Million Rs. FY11 126,780 160,706DistributionServices Million Rs. FY11 3,101,523 2,979,241 Wholesale & Retail Million Rs. FY11 1,000,477 963,368Trade Transport Storage & Million Rs. FY11 581,388 574,101Communication Finance and Insurance Million Rs. FY11 260,172 277,555 Ownership of Dwellings Million Rs. FY11 158,707 155,916 Public Administration & Million Rs. FY11 385,506 340,508Defence Community, Social & Million Rs. FY11 715,273 667,793Personal Services