Banks to monetise Rs1.6 bn contractor bills on Treasury letters
View(s):Sixty-seven government contractors kept in waiting for a long period to get their payments for outstanding bills for the Rs1.6 billion worth of work done in state development projects will be getting liquidity facilities from banks soon.
However commercial banks have expressed concern on liquidity issues when getting the refinancing facility from the Central Bank (CB) by pledging liquid government securities as collateral to provide loans for cash-strapped contractors.
The Finance Ministry has issued “Letters of Acceptance of Payments of Outstanding Bills due to Contractors (LAPC)” enabling them to obtain 4 per cent concessionary loans from banks, a senior Treasury official said.
Up to May 31, the ministry has approved the repayment of outstanding bills amounting to Rs.29.4 billion of contractors and suppliers; he divulged adding that out of this amount LAPC’s have issued for Rs.16 billion up to now.
Most of the outstanding payments amounting to around Rs. 80 billion had been settled by the Treasury using available funds and the balance money could be settled with allocations that will be made in the 2021 budget of the new government, he pointed out.
In June, the CB introduced a scheme titled ‘Liquidity Facility for the Construction Sector’ (LFCS) to address liquidity needs of the sector due to outstanding payments from the government for construction projects carried out in the past.
The facility would allow construction firms backed by a LAPC due to contractors and suppliers’ issued by the Treasury to borrow from banks.
According to the CB directive, banks would obtain re-financing for these credit facilities from the CB with promissory notes secured by pledging Treasury Bills and Bonds.
The CB loan to the banks for duration of 180 days would be at 1 per cent per annum and in turn the banks would lend to the construction firm at a maximum interest rate of 4 per cent.
The CB will credit the face value of the promissory note to the respective account of the bank after verifying the adequacy of the pledged securities.
Provision of liquid government securities as collateral will affect liquidity ratios of banks, several CEOs of banks complained.
One risk is that the government may not make the payments on or before 31.12.2020 and may extend the validity period of the Letters of Acceptance, they added.
The Treasury official noted that the reason the government has delayed payments to contractors and suppliers was because of budgetary constraints in the current ‘Vote on Account’ and that this situation will be addressed after the parliamentary elections in August 2020.
Although the government stated that the accumulated dues for contractors was around Rs.130 billion and most of it had been settled, the actual amount due was Rs. 400 billion, construction industry stakeholders said.
Most of the SMEs in the sector are not willing to get a loan at an interest of 4 per cent instead of direct settlement from the Treasury, they complained.
(BS)