Long Thread

Looking forward to IIW and Raza Baqar fan base to jump on another opportunity to profusely TC and praise the one-trick-pony under whose leadership SBP has been criminally behind the curve.

Apr 6: Revised hospital financing policy by SBP

SBP governor needs to do a couple of months internship at a commercial bank or at a minimum make a few calls to hospitals and bankers before announcing their policy. announced. The press release says that talked to stakeholders but I wonder did they really listen to them.

This was the TC by BR of their earlier policy announced on March 17. https://www.brecorder.com/2020/03/19/581428/sbps-response-to-covid-19-challenge/ while aap ke bhai ki short thread criticizing the same useless policy

The policy was a failure in 3 weeks as it does not take into account how banks or hospitals work. Before we analyze the policy, a brief background on how banking works for the benefit of those n00bs who will jump on it to teach me how banking works.

A bank is in the business of making money by lending money and getting it back with ̶i̶n̶t̶e̶r̶e̶s̶t̶ profit. Lets consider construction lending which is how the SBP banking facility comes across. There is balance sheet lending and there is project-based lending.

In Balance Sheet lending, bank looks at existing business and assets of the borrower and lends if the existing business can payoff the loan. It registers a charge/mortgage over assets of borrower as security. This is called collateral.

The bank may sell the collateral if the borrower defaults to settle the loan. Most of the balance sheet lending is against collateral. The reason why SMEs and common man can't and don't borrow from banks in Pakistan is they don't have good collateral. (I am simplifying here).

In project-based lending, the bank assesses the particular project's profitability and its ability to pay back the loan. This requires technical analysis and banks usually hire technical consultants to see if the project makes sense.

Technical consultant advises the bank what it will cost to construct the project, the time it will take, reviews the commercial agreements for any risks and monitors construction of the project and also advises the bank that whether project will make money to payback the loan.

If the bank is satisfied with the risk and believes that the borrower has the capacity to manage the project as per the feasibility of the consultant, the bank may decide to lend to the borrower.

In all projects (whether balance sheet lending or project lending), significant working capital financing is required in addition to construction financing explained above. This can be up to 100% or more of the construction loan amount.

Despite all of this, loans still go bad due to mismanagement, cost overruns, optimistic assumptions in the feasibility, circumstances beyond anyone's control for example Covid-19 right now.

When loans go bad, in Pakistan specially, shareholder and directors of bank, SBP, FIA and NAB etc make the life of the people on the file miserable unless the senior management of the bank decides to stick up for those officers.

But there is a limit. If the head of the country is a vindictive petty person, one only need to look at the ordeal the previous MD of PSO is going through despite reportedly a person of integrity yet no one dares speak up much for him. But I digress

Let's take an example. Civil Hospital wants to build a new ward. If Balance Sheet lending, a bank will see if Civil Hospital can generate enough profit from their existing business to pay back the loan and i̶n̶t̶e̶r̶e̶s̶t̶ profit in 5 years.

Civil hospital will have to provide audited financials, a collateral that has not already been given to a different bank for existing borrowing in addition to the usual paperwork that a bank requires. Civil hospital may or may not have that capacity. Pvt sector hospital may.

For project lending, the bank will have to assess if the new project is profitable on stand-alone basis. May have to hire a consultant to review the feasibility of the project and monitor the construction for the bank.

A bank usually doesn't know what is required to construct a hospital ward, what equipment is required, what material is used etc. The consultant will advise the bank on it. Based on the consultant's advice the bank will release the money in installments as construction progresses

The bank will register a charge on the land of newly constructed isolation ward and its equipment. Technical feasibility will need to show that isolation ward will pay back the loan and interest sorry profit in 5 years (that is SBP limit).

In addition, construction projects (whether balance sheet lending or project lending) require significant working capital financing in addition to construction financing explained above. This can be up to 100% or more of the construction loan amount.

Say a textile magnate borrowed Rs. 100M (pulling numbers out of air) of construction financing to build a state-of-art plant. Now he needs to buy cotton, pay employees, pay utility bills, sales tax (refund of which he will have to wait years), shipment cost

He will get paid when he ships all this stuff, assuming he gets the bills purchased or discounted by his bank. Say it takes 3 months from acquiring cotton to shipping it, he will need to have 3 months of working capital in hand. This can be a significant amount of money.

But let's also consider what the borrower i.e. hospital is assessing. lt will need to see if the isolation ward or the equipment that it is buying will enable it to payback the loan with profit in 5 years as that is the SBP loan limit.

Unless Covid is a profitable business, no hospital will go for it. The reason hospitals don't have ventilators is not that they can't buy it. Ventilator operation is an expensive proposition and not very profitable unless all patients are rich patients constantly on ventilators.

In addition to ventilator cost, hospital needs to look at working capital. Needs to hire new staff to man it, paramedics, utility bills, operation and maintenance of equipment. This costs a lot of money. SBP financing isn't clear whether its available working capital financing

Also as per the SBP, the facility is maximum Rs.200 million per hospital and for 5 years. To put it in perspective, the maximum a hospital can borrow is Rs. 20 crore for 5 years and to generate a profit of Rs.3 crore per year after paying all expenses overheads to pay interest.

In addition, hospital may have to refinance or pay off the 20 crore principal after 5 years. That hospital may need to come up with Rs.20 crore either from profit or somewhere else to pay off the loan.

You may say SBP may come up with a policy in 5 years that will allow banks to extend the loan for another 5 years. Banks are not in business of making loans guessing what SBP policy be in 5 years.

How the hospital will know it the loan will still be at 3% after 5 years. Too many unknowns. What if Corona goes away this summer or next summer? All that facility that was specifically built for Covid patients is empty now. Revenue is zero yet huge overheads.

It can be repurposed but that will require another loan for conversion (which won’t be at 3%) plus staff retraining and equipment costs.

So how profitable is the Covid business now.

Peshawar Northwest, one of the largest private hospital in Peshawar, halved their wage bill after Corona.

10% to 50% deduction in hospital wages in public and private sector in Sind after Corona https://twitter.com/2paisay/status/1246288955219329025?s=20

But, hmm, what if hospitals use this facility to expand their existing services. Say Aga Khan, Indus Hospital or South City decide to expand into other facilities. There is shortage of all sorts of health facilities in the country.

SBP clarified in its press release that no, this is only for Covid related and isolation ward related stuff and banks to ENSURE that it is used only for intended purposes.

Who the eff in a bank wants to have this additional responsibility. If something goes wrong, who will handle the directors, shareholders, SBP inspection team, NAB and FIA and god forbid petty vindictive person is still PM or a joker like Saqib Nisar decides to open an inquiry.

May be a couple of hospitals may use this facility, but the facility as it is structured now shows you that as always under Raza Baqar not much brain power has been used at SBP.

Criticism is easy. How will one structure such a facility?

By asking questions but the most handsome government by having largest number of foreign educated and imported personnels and fanbase who can’t stop name dropping the international banks they have worked for don't like to ask. They have all the answers.

Is Covid-19 business profitable for hospital? If the answer is no, let’s keep it for another day and another thread on how such facilities are structured. If the answer is yes What is the profit margin? Can the reasonable be paid in 5 years from the profit?

If it will take more than 5 years then the term of loan should be more than 5 years. Will the covid-19 business die in 2 years with hospitals required to repurpose the facilities? Then the loan should be structured such that it allows another loan for repurposing the facility.

Otherwise, the facility will go into disuse and loan into default. Yes yes. Shrewd seth owners of hospitals and private hospitals can pull magic tricks by over-invoicing, charging rich clients, etc and make the facility work somehow.

That just means that inspite of the loan refinance facility getting structured incompetently, the enterprising-ness of rent-seekers made it work. Looking forward to a TC oped in BR. They love Raza Baqar SBP over there.

As an aside, on March 17, SBP announced 3 steps including the hospital finance and all 3 of them have been useless as my 2nd tweet in this thread pointed out.

The first one was so useless that it was overruled few days later with a larger cut despite the fact Raza did ballot stuffing to get it approved.

https://twitter.com/2paisay/status/1243772968800485377?s=20

I should do a thread one day on how one trick pony and other IMF, WB, ADB, IFC returnees had no new ideas

But as Abdul Hafeez Shaikh says, I haven't entered corridors of IMF so what do I know. Kthxbi