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Not So Easy Loan, Young Man!

Not So Easy Loan, Young Man

Pakistan is abuzz with two-million-rupee talk nowadays. Prime Minister’s Youth Business Loan Scheme has become the talk of the town from Karachi to Khyber. And a lot of hue and cry on its ideological and practical failures and successes is in the air.

Regardless of the implicit objections, Nawaz government has attracted attention of youth. It’s a big political achievement as they are not only prospective loan-seekers but voters too. Notwithstanding this, major chunk of this 40-million strong youth had shown their support for Imran Khan in May 11 elections.

Besides alluring youths, he is preparing his ‘charismatic’ daughter Maryam Nawaz for a bigger role in the state of affairs as she has been made the Chairperson of this scheme. Apart from the question whether she really qualifies for such an executive role, it seems that PML (N) is using state resources to woo the youths of Pakistan. This loan scheme is a broad spectrum of wooing tactics—such as Laptop Scheme—plus grooming Maryam for politics.

Economic managers and financial analysts are wary of his scheme as the conditions set therein are too harsh. For instance:

1. If the government, at any stage, cancels this scheme, for any reasons, then applicant will have to repay the loan according to the new markup rate.
2. Bank, without any notice to the applicant, can withdraw or retake the loan mone y from any account of the borrower.
3. Guarantee from a government servant of BPS-15 or higher and attachment of his pay slip or a bank statement of 150% of the demanded loan in the form of bank statement is to be provided.

The fundamental problem is the financing of subsidized loans by the banks. It’s impractical in sheer sense as the inadequacy ratio is as high as 60%. Under the Scheme, youths can borrow Rs. 100,000 to Rs. 2,000,000 at a subsidized interest rate of 8%. The young borrowing entrepreneurs i.e., between 25 and 45 years of age, will set up small businesses. The government will pick up 7% difference in the rate paid by the borrowers and charged by the banks.

Banks in Pakistan always lend money to poor with zero-risk factor. No solid mechanism is witnessed. The banks will not accept majority of loan applications under one pretext or the other unless they find their investments secure; highly unlikely in this case!

Secondly, the three conditions for securing loans really make it insurmountable for an average literate unemployed citizen. How on earth will they find a guarantor of 15th grade or above? Luckily, if they find one, then how would they convince the guarantor for bearing the brunt, if the business scheme goes default?

Alternate condition, of having 150% of the borrowed amount in his bank account, speaks volumes on the difficulties that a “would-be borrower” may face in securing the loan.

Last but not least, the scheme is a joke in a sense that youths don’t need to develop a business plan on their own. All they need is to go to the SMEDA website where they will learn that the SMEDA has taken the initiative of developing pre-feasibility studies in many a sector and as per the PM’s directives, has made them available to the loan beneficiaries, for the promotion of an entrepreneurial culture in the country. The ones, who cannot even make a business plan on their own, will start a real business successfully in a cut-throat environment. This poses a big question on repayment to lenders. All seems like a pipedream. Isn’t it?
How on earth will they find a guarantor of 15th grade or above? Luckily, if they find one then how would they convince the guarantor of bearing the brunt, if the business scheme goes default?
“I see the Prime Minister’s Scheme bearing the signs of sub-prime lending because many unsuspecting individuals will end up borrowing huge sums for projects they will not be able to plan or execute, thus resulting in defaults. Remember, if the prospective borrowers are not required to furnish a business plan, how the lenders will differentiate entrepreneurs from subprime borrowers?” wrote Murtaza Haider, a senior columnist, in the country’s leading newspaper recently.

“The two leading banks in the Prime Minister’s Scheme are the National Bank and the First Women Bank. The lenders have set the lending (interest) rate at KIBOR plus five percentage points. Since the base rate in Pakistan is hovering around 10 per cent, the lenders are adding five percentage points on top of it to end up with an interest rate of 15 per cent. However, if the base rate fluctuates, as it has done in the past, the cost of borrowing can change as well. This can play havoc with the balance sheets of even well-planned businesses who may have naively assumed that they were protected from fluctuations in interest rates,” he further elaborated.

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The launch of the loan scheme rings sweet bells into one’s ears but the conditions applied work as an ear-deafening and highly-discouraging factor. Some 5.5 million forms have been downloaded, as on December 18, 2013. But enviable and enthusiastic youths are becoming furious as they have started knowing the truth that the promised loan for a better life is a far cry. The conditions need to be lax for the success of this loan scheme. Or, the scheme should have the cover of re-insurance, which means higher interest rates. If so, it goes on par with current loan facilities and dries up the very idea of easy-loan available for those youth who yearn for making a living on their own. Otherwise, it will end up in billions of rupees in toxic debt just like a scheme Nawaz Sharif in his previous stint had launched: the Yellow Cab initiative. It may end up becoming a massive exercise in sub-prime lending where the defaulted amounts will be added to the ever-growing public debt.

BY: Asad Kaleem

The writer is a renowned journalist.
He can be reached at: lionkaleem@hotmail.com

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