CONTROL OF BANK CREDIT IN

PAKISTAN

State bank of Pakistan use four tradition

weapons

to control bank credit in Pakistan.

BANK RATE

OPEN MARKET OPERATION

VARIABLES RESERVE REQUIREMENTS

SELECTIVE CREDIT CONTROL

BANK RATE

Bank rate or discount rate is the rate

fixed by central bank at which it

rediscount first class bill of exchange

and government securities held by

commercial banks.

CONTINUE……If need to expand the economy central

bank lower the bank rate commercial

bank borrow more and customer also

borrow from commercial bank and vice

versa.

OPEN MARKET OPERATION

In open market operation sale and

purchase of securities, bills and bonds

of government as well as private

financial institution.

CONTINUE….If need to expand the economy central

bank purchase securities and if need

to contraction the economy central

bank sell the securities.

VARIABLES RESERVE

REQUIREMENT

Every commercial bank is required by to

maintain a minimum percentage of

deposit with the central bank its called

required reserve.

CONTINUE…..

When the central bank raises the

reserve ratio of commercial bank then

its control bank credit and vice versa.

SELECTIVE CREDIT

CONTROL

Regulation of credit for specific

purposes or sectors of economic

activity is resorted to and it is called

selective or qualitative credit control.

CONTINUE…….Through selective credit control SBP

control credit is following.

It can formulate credit policy for all

banks or any particular banks in

Pakistan.

Any particular bank or all banks in

Pakistan are bound to follow the policy

determined by the state bank.

It may direct the banks in Pakistan to

charge a certain rate of certain rate of

return on advances.

National credit consultative

council

It was set up in September 1972 to achieve a more

purposeful and equitable distribution of bank

credit.

Functions of NCCC

To review the overall credit situation in

the country.

To review the region-wise and sector-

wise distribution of bank credit

To review the situation regarding

concentrating of bank credit

To make recommendations to the

government with respect to monetary

and credit expansion

Cont… To set specific targets for

1. agriculture loans

2. small loans to be provided by the

commercial banks.

Set out annual plans

To periodically review the progress in

the implementation of its

recommendation and modify previous

recommendation in the light of

emerging situation

Members of NCCC

NCCC consist of

members of representing the

government

Provincial government

Banks and financial institutions

Representatives from business

Industry and agricultural in private

sector

Small and enterprise financing

Prudential regulation for SME

financing have defined employing not

more than 250 persons (if it is

manufacturing\service concern )

50 persons (if it is trading concern)

Securities

Limit on clean facilities

Minimum conditions for taking

exposure

Characteristics of SMEs

Owner is the manager & few employees Owned & operated independently Relatively small investment, production, sales, dealings etc.

Inadequate efficiency of business operations - no relationship with other firms or parties for investment

Management

Finance

Tax accounting

SME Sector in Pakistan

◦ 3.2 million business units in Pakistan

Over 99% business units employ less

than 99 persons i.e. 3.16 million SMEs

Generate 78% of non-agri sector

employment

Direct Contribution to GDP over 30%

Generate 25% of Manufacturing Export

Earnings

Contribute 35% in Manufacturing Value

addition

Agriculture finance

It is most important for Pakistan and

65% of the population of country

engage in the profession of

agriculture.

Kinds of loans

There are three types of loans short term loansThey are taken at the most for one crop

period and used for seeds, fertilizers, pesticides and wages of hired labor.

Medium term loansThey are taken for three years and used for

purchase of tractors, tube well, live stock, cattle and live stocks

Long term loansThey are taken above period of three years

and used for buying land, building, constructing embankment etc etc

Sources of finance

Informal sources

Village Money Lenders

Friends & Relatives

Landlords Institutional

Formal sources

The government

Statutory agencies

Commercial banks

Cooperative credit societies

the government

Provide Taqavi loans

These loans are given mostly on personal bonds or on securities.

Provided for medium and long term purpose of

Construction and repairs of wells

Preparation of land for irrigation, reclamation and clearance of land for agriculture purpose

For protection of land from floods and erosion

Statutory agencies

These agencies are called ‘’agricultural

development bank of Pakistan’’

renamed as ‘’zarai taraqiati bank’’

Advancing medium and long term

loans to the agriculturist

Providing education and guidance to

them for improvement of method of

cultivation.

Co-operative banks

Cooperative bank is retail and

commercial banking organized on

a cooperative basis. Cooperative

banking institutions take deposits and

lend money in most parts of the world.

Provide loans for a given shorter

duration for specific purpose on soft

terms.

Current schemas in Pakistan

Asan Qarza Scheme

One Window Operation

Zarkhaiz Scheme

Sada Bahar Scheme (SBS)

Commercial Banks

“A bank which provide services to general public

and companies”

C.B plays an important role in agriculture sector

but due to lack of securities ,bad funding

structure and property right issues unable to

provide long term loans.

To overcome this flaw SPB make AGRICULTURE

DEVELOPMENT BANK OF PAKISTAN .

Till 1972 commercial banks are no permitted to

finance agriculture sector

But now STATE BANK OF PAKISTAN establishes

targets for each financial year .

Targets are :

Provide short term loans for

production purpose

Provide long term loans for

development purpose

Provide long term loans for non

farming activities

C.B provides loans through mortgage.

Features of credit scheme are :

1. provide short term loans for seeds

,fertilizers and pesticides .

2.Provide short term loans for poultry

and fruit farming . After completion of

due date provide concession in

markups and fines.

Repayment can be made with in 18 to

24 months. also provide grace period.

3.Provide medium term loans for the

development purposes with the time

limit of 5 years. Also provide grace

period of 12 months.

4.Provide medium term loans for non

farming activities with the time limit of

7 years and 18 months grace period.

5.Provide long term loans for the

development purposes with the time

limit of 7 years and 18 months grace

period

6. Provide long term loans for non

farming activities with the time limit of

7 years and 18 months grace period.

Industrial finance

“Financing for the development of the

industrial sector”

Two purposes of financing:

1. For block capital:

to purchase fixed assets :building

,machinery and land to modify and

modernize the units. All these required

long term loans and C.B is unable to

provide it.so (IDBP) AND (PICIC) were

Developed.

2. for working capital:

Need of finance To meet the expenses

and production cost. These are short

term loans are provided by the C.B.

In 1949 ,PAKISTAN INDUSTRIAL

FINANCE CORPORATON was

developed which provided loans to

public companies and cooperative

units.

After the changing the charter (PIFC)

also provided loans to individuals and

private companies. but they provide

loans in local currency .

in 1957 PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION was developed. They provide loans in local and foreign currency but (PICIC) provide long term loans to big industrial units.

In 1959 INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN was developed which provide loans in local and foreign currency to all big and small business units, and covers all the previous flaws.

Provide loans to cotton,wollon,chemical,leather industries and cinema halls.

IDBP provide loans after investigation Of

Financial, marketing and managerial

aspects of the industrial units and after

satisfaction provide loans to them

Commercial banks and

industrial finance A huge network of C.B.P operates to

provide safe custody, money transfer and advisory services .SPB recommended commercial banks to provide short and medium term loans to industrial units.COMEMERCIAL BANKS also permitted by the federal govt to make advancement to encourage and support the small industrial units and new comers.

EXPORT FINANCEThe exporter face two very difficult phases in

financing exports.

First is to obtain credit from banks and financial

institution .

Second is to secure advances or credits in the

form of discounted bills.

Export Credit Guarantee

SchemeGovernment of Pakistan introduced the export

credit guarantee scheme through the Pakistan

insurance corporation in the year 1965.

This scheme provide exporter the pre-shipment

and post-shipment guarantee of cover some risk.

Pre-Shipment Financing

The policy provide provide bankers with

an unconditional guarantee against

losses result from pre-shipment

advances or loans against firm contract

of sale for export.

Risk Coverd

The insolvency of exporters.

The failure of the exporter to repay the

loan with in six months of the due date

of payment.

Changes in the policies of the

government of the importer’s country.

In the case of protracted loan , non-

delivery of the shipping document, or

default in payment.

Transaction Insured

All advances and loans made against

firm contracts of sale to facilitate of

goods for export are eligible for cover

under this scheme.

Proportion of loss covered

Loss is shared equally by the scheme

exporter and banks 50%.

Premium Rate

The rate of premium for the Export

Finance Guarantee is 10 paisa per

Rs.100 per month.

Settlement of loans :

In the event of the insolvency of the

buyer the settlement is made

immediately on proof of insolvency.

In the event of default the settlement is

made six months after the due date of

payment .

Post-shipment Finance

Export Credit guarantee scheme

insurance policy which indemnifies an

exporter against losses arising from the

insolvency and protracted default of

overseas buyers.

Due to licensing restrictions , war or civil

disturbances in the buyers country.

Scheme give 75% security at least.

Limitation of the cover

Cover is given in respect of specified

loans under the policy . Considering the

credit worthiness , suitability of the

exporter and banks own assessment of

the financial standing and integrity of the

exporter.

Export Finance Scheme

• Introduced by State Bank of Pakistan

• Provide finance to exporters

• At concessional rate

• Through commercial banks

Aim of Providing Finance

To facilitate exporters

To make the economy strong

To achieve positive balance of

payment

Characteristics

Two Parts: Part I & Part II

Part I: Case to Case basis

Part II: Performance basis

• Free to obtain finance from more than

one bank

Eligibility

Legal business

Home demand fulfill

Illegal goods(drugs)

wheat or raw cotton

Refinance from State Bank of Pakistan

Re payment of loans

Basis Of limits under Part I & Part II