50 percent margin on sugar trade financing impsed by SBP

KARACHI (February 10 2009): As a step to curb sugar hoarding, the State Bank of Pakistan (SBP) on Monday imposed 50 percent cash margin condition for financing sugar trade. Sugar price has been on the rise during past two weeks due to rising demand and low supply. Besides, trend for hoarding of commodity has also been observed, sources said.

During last ten days, the price of sugar has mounted by about Rs 5 per kg from Rs 38 to Rs 43 per kg in retail, although the federal government recently had announced to import some 0.2 million tons sugar to meet the local demand and to stabilise its prices at a reasonable level. The central bank has issued instructions for financing against the security of sugar stock including raw sugar and refined sugar.

To discourage hoarding of sugar, banks and DFIs have been advised by SBP in a circular issued on February 9, 2009, to ensure meticulous compliance including 50 percent cash margin. The SBP has instructed banks and DFIs that all existing loans or advances against security of sugar stocks (disbursed before the crushing period of 2008) should be fully adjusted, latest by March 31, 2009.

Loans or advances against fresh stock (disbursed after start of crushing period 2008) should also be fully adjusted, latest by July 31, 2009. However, any renewal or fresh disbursement of such loans or advances should be made only after a clean-up period of at least one month after adjustment of previous loan.

As per new instructions, all renewals or fresh disbursements of financing facilities against sugar stock shall henceforth be subject to a minimum cash margin of 50 percent, and the banks and DFIs would not finance the cash margin themselves, the circular said.

The SBP also has instructed the banks and DFIs that no fresh financing renewal will be allowed against hypothecation of sugar stocks, and they will monitor the position of pledged sugar stocks and ensure that release of pledged stock should result in corresponding reduction in outstanding loans or advances. However, SBP has made it clear that these instructions will not be applicable to financing facilities provided to Trading Corporation of Pakistan.

In order to enable the State Bank to monitor the situation, all banks and DFIs would submit the position of their outstanding loans or advances against sugar stock on fortnightly basis to SBP as per SBP format within three days of the end of each fortnight.

“Any violation of the above instructions shall attract punitive action under the relevant provisions of the Banking Companies Ordinance, 1962,” the SBP warned. Sugar millers have termed it as an anti-industry step, and demanded withdrawal of cash margin.

“This step would directly hurt the sugar industry, which is already facing financing problems and need huge amount to make the payments of poor growers”, said Abdul Wajid, Chairman Pakistan Sugar Mills Association. He said that sugar industry is unable to meet the restriction of 50 percent cash margin due to financial problems. He said, “Imposition of huge cash margin for the financing of a food item is unbelievable and would create panic in the market.”

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