Presentation on theme: "1 Reengineered LMM Scheme A presentation to Leasing Association of Pakistan Qasim Nawaz Joint Director Banking Policy Department 23 September 2004."— Presentation transcript:
1 Reengineered LMM Scheme A presentation to Leasing Association of Pakistan Qasim Nawaz Joint Director Banking Policy Department 23 September 2004
2 Things to be discussed –Why reengineering of LMM New Vs Old –Role of Leasing Companies –Details of Scheme –Q&A
3 Reengineering of LMM- Objectives –Foster the Industrialization by facilitating the flow of credit to priority areas –Development of Engineering Sector –Boosting the SME Sector –Extending the scope of the scheme to the manufacturers in addition to the purchasers –Inclusion of NBFCs (i.e. Leasing companies, Investment Banks & Modarbas to ensure the flow of credit to the target market)
4 Main differences Previous Scheme Manufacturing Industries Certain Manufacturing Industries not eligible Certain non –manufa- cturing industries- eligible Usage in Manufacturing process Modified Scheme Specified Industries- Eligible Industries Eligible Industries Usage in the entire processes- manufacturing, as also preservation and packaging of the output
5 Role of Leasing Companies Why Leasing Companies? Which Leasing company? –Criteria for selection as PFI Meeting the Minimum Capital Requirement of SECP Last three years profitable operations Must have prior profitable project financing experience Must fulfill the required credit rating= Minimum investment grade (BBB) Financing under the scheme should be in compliance with relevant PRs Criteria for bank Refer list
6 Sanction of limit and Grant of refinance facility Limit fixation- Criteria –equity based, linked with performance as an institution –for leasing companies SECP assessment will be paramount, weightage to on site inspection reports, off site surveillance as well as the rating assigned by rating agencies. –In case of leasing PFI, their lease under the scheme should not be exceed 10% of their total leases business or 25% of the lease business under machinery financing, which ever is lower. Receipt of applications in May each year Refinance-SBP BSC (Bank) –Certified copy of ILC/DD and disbursement details. Documents to be submitted to SBP- 3 –LMM-1 request of disbursement from PFI –Agreement on Form LMM-2 –DP Note to be submitted by PFI to SBP on LMM-3 –DP Note of borrower endorsed by PFI in favor of SBP on LMM-4
7 Use of Scheme by Leasing companies –Only for Purchasers- It does not restrict payment to manufacturers on behalf of purchaser Request from borrowerProcessing of request-2months Interim or final payment Selection of the manufacturers Lease facility approved Payment to the manufacturer Advance Payment Three quotations, NWT- Inspection Facility in the Name of the purchaser- the lessee
8 Role of SECP –As a regulator of NBFCs- Leasing Companies, Investment Banks, Modarabas –SBP to rely on SECP –Procedure ; State Bank to request SECP each time a leasing company, investment bank or modarada approaches SBP for getting status of PFI Continuous liaison as the Scheme is long term Request for a contact person for speedy disposal of reference as also continuous exchange of information.
9 Financing / Refinancing under LMM Financing is available only to local components/contents used in the locally manufactured machinery for use by the Borrower. If imported component exceeds 80% of the ex- factory/showroom price, then no financing for residual local components. Re-financing available to the extent of 100% of the amount disbursed by the PFI subject to above limits. [Cost of ins. Erection, commissioning and other charges are not covered under the Scheme] PurchasersManufacturers 100% of the Local contents minus advanced payment, if any 80% of the Local contents minus advanced payment, if any
10 Computation of permissible amount of refinance -LMM a. Total value of the contract b. Landed cost of Imp. Component c. Net Value (a – b) local comp. d. Gross amount permissible e. Less amount of adv. (Upto 10%) f. Net amount permissible under LMM NA 90 RS ManufacturerPurchaser
11 LMM-Facilities to Purchasers-features Lending in compliance to the applicable PRs Sponsor’s share in the equity to held in escrow account Mode of payment-DD/Pay order for purchasers from suppliers-ILC/DD for payments to Manufacturers Period of Financing-7-1/2 years including a grace period of 1-1/2 year Repayment of Loan –in equal 12 half yearly or 24 quarterly installments
12 LMM-Facilities to Purchasers-features- ( Cont’d..) Working Capital-to ensure availability from any of the member PFI or any other bank Rescheduling of loan-yes but at new rate if the same is higher on the date of such rescheduling (total period not more than 7-1/2 years)- Refinance as per original terms-differential of mark up to be borne by the borrower PFI is liable to refund within 3 W.Ds from receipt of payment from borrower
13 Availability of Funds-Sanction of limit and Grant of refinance facility PFIs to preferably meet the credit needs of SMEs On first come first serve basis-PFIs not to commit over & above the limit to be sanctioned by BPD on yearly basis PFIs to undertake due diligence process as per their lending policies, risk profile of the borrowers Credit Risk by the PFI- SBP to recover the refinance on due date Disbursement of funds after ensuring normal pre- disbursement requirements.
14 Rate of Markup On service charge basis SBP will determine rate on the basis of weighted average yields of last two auctions of TB of 6 month /12 month upto 2 yrs & PIB of 5 years tenors upto 7 ½ yrs Contrary to EFS, there is no reprising mechanism. The rate is revised on annual basis effective from 1st July each year -IRR to SBP PFIs are allowed a maximum spread of 2%
15 Rate of Markup TenorRate of refinance for PFIs Maximum Rate of Finance PFIs can charge from borrowers For financing upto 6 month 2.0%4.0% For financing exceeding 6 month but upto 2 year 2.5%4.5% For borrowers requiring financing over two years upto maximum period i.e. 7 ½ years. 5.0%7%
16 Penalty Clause Rate of fine: 60 paisa per day per Rs 1000/- –Fines to be absorbed by PFI if they are at fault –Borrowers only if borrower is at fault –PFI to provide indemnity to SBP against any litigation by borrowers where fine has been passed on to them merely on the basis of its recovery by the SBP. Such actions to be justified by the PFI on their own merit
17 General Treatment of refinance amount & outstanding amount in the PFI’s account-outstanding refinance not to fall below o/s in the books of PFIs SBP’s right to appoint an independent consultant to verify the use of funds. No cap on borrowing however, over Rs. 300 million, PFI should provide facility under consortium finance or to participate in Syndicate to mitigate their risk.
18 Thank You Questions
19 LMM- Eligible Industries (Cont…) 1. Fisheries Dairy and Live stock Products. 2. Light Engineering 3. Marble & Granite 4. Gems & Jewelry 5. Leather manufacturers and Leather Garments 6. Boat manufacturing /modifications including equipments used for preserving the fish in the open sea. 7. Local Vendors manufacturing parts of Automobiles including tractors and other agricultural equipments assembled /manufactured in Pakistan, for local sales as also exports. 8. Power Looms/ Auto / Airjet and shuttles looms for units to be set up in the Power Loom Clusters being established in different cities of Pakistan. 9. For units to be set up in the Ceramic Clusters being established in different cities of Pakistan 10. Equipments used for cutting and polishing of Marble & Granite and manufacturing of handicrafts thereof. 11. For setting up of units for the purpose of preservations/ packaging of fruits and vegetables including Dates and other similar fruits.
20 LMM- Eligible Industries 12. Wooden Furniture 13. Handicrafts made from wood and other metals. 14. Machinery used for knitwear and hosiery industries. 15. Machinery, equipments used in the thermal/hydro power projects (this facility shall be available to manufacturers only) 16. Machinery required for setting up of flour mill (only for SME. 17. Machinery used for Rice husking units (only for project in SME sector as per definition of SME given in Prudential Regulations for SME or unit having annual export earning of upto 2.5 million US $ or equivalent) 18. Agricultural Equipments including water sprinklers. 19. Transport equipments (excluding CAR but including commercial vehicles for business use, manufactured /assembled in Pakistan with at least 50% deletion. 20. Machinery used in the manufacturing of the pulp board etc go back Go to slide-5
21 Selection of PFIs- Eligibility Criteria Banks /DFIs –Meeting the CAR-Any indulgence by SBP to continue to be considered as non-compliance –Must have prior project financing experience –Must fulfill the required credit rating –Investment Grade Go back
22 Facilities to Manufacturers-features Successful bidder i.e. a Certificate of acceptance from the PFI Inspection report by the PFI to judge the capabilities of the manufacturer-Copy of report prepared by the PFI of purchaser Maximum financing is upto 90% of the contract amount after adjusting for the landed cost of imported components and the amount of advance payment Period of financing-immediate repayment on receipt of payment from purchaser’s bank-if payment withheld- manufacturers to make arrangements for repayment to PFI Facility not available under the existing Scheme- feature of the modified version- Why? –WC financing-reduction of price
23 Facilities to Manufacturers-features - (cont,d…) Manufacturers to sign an agreement for assignment of receivables- in addition to provision of other securities for loan acceptable to PFI. Purchase of inputs/ material/components etc, procedure for procurement as applicable for purchasers shall also apply. Modifications in terms of supply-force majeure –Re-fixation of repayment date- refinance date- Extension only in genuine cases –In all cases (including those involving extension in repayment) repayment to be made in 2 years for loans exceeding Rs 200 million and one year in all other cases