‘Cotton Ginning’

Research Report on ‘Cotton Ginning’ Segment

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Research Report on ‘Cotton Ginning’ Segment

Acknowledgement

This segment booklet has been developed by M/s Corporate Partners (CDP) who was
commissioned by State Bank of Pakistan (SBP) to conduct the market research.

SBP‟s Infrastructure, Housing and SME Finance Department provided critical facilitation
and oversight for this initiative. State Bank of Pakistan is the Central Bank of the country.
Like a Central Bank in any developing country, State Bank of Pakistan performs both the
traditional and developmental functions to achieve macro-economic goals. This role
covers not only the development of important components of monetary and capital
markets but also to assist the process of economic growth and promote the fuller
utilization of the country‟s resources. The role of DFID, UK is also acknowledged here as
the cost of the research study was funded by this organization under the Financial
Inclusion Program.

This report contains market research and proposed banking products, based on primary
research survey results and secondary sources, carried out for SME segment “Cotton
Ginning” by Corporate Development Partners (CDP).

The purpose of this research report is to provide segment specific credible information
for the commercial banks to facilitate them in designing and delivery of banking services
to small and medium enterprises (SMEs) in a responsible, profitable and sustainable
manner.

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Research Report for ‘Cotton Ginning’ Segment Section
1

Table of Contents
1 Guidelines for using this Research Report ............................................................................. 1
1.1 Market Assessment ........................................................................................................ 1
1.2 Product Suite .................................................................................................................. 1
1.3 Marketing and Distribution .............................................................................................. 1
2 Introduction & Objectives ....................................................................................................... 2
2.1 Limitations of the Study ................................................................................................... 3
2.2 Sampling Plan................................................................................................................. 4
3 Economic Overview ............................................................................................................... 8
4 Cotton Ginning Industry Overview ........................................................................................ 10
4.1 Demand ........................................................................................................................ 11
4.2 Supply........................................................................................................................... 11
4.3 Key Players................................................................................................................... 13
4.4 Trade Body ................................................................................................................... 13
4.5 Recent Developments................................................................................................... 13
4.6 Future Developments.................................................................................................... 13
4.7 Cotton Ginning Process ................................................................................................ 14
4.8 Success and Survival of the Businesses in this Sector ................................................. 16
5 Market Assessment ............................................................................................................. 17
5.1 Market & Demographic Profile ...................................................................................... 17
5.1.1 Market Sizing and Lending Potential ...................................................................... 18
5.1.2 Segment Demographics ........................................................................................ 19
5.2 Owners Profile .............................................................................................................. 20
5.3 Business Linkages ........................................................................................................ 21
5.4 Business Cycle ............................................................................................................. 23
5.4.1 Working Capital ..................................................................................................... 24
5.5 Financial Assessment and Profile ................................................................................. 25
5.6 Financial Information..................................................................................................... 26
5.7 Indicative Business Requirements ................................................................................ 28
5.8 Financial Need Analysis ................................................................................................ 29
5.9 Usage of Banking Products........................................................................................... 31
5.10 Segment Risk Considerations ....................................................................................... 32
6 Proposed Banking Product Suite ......................................................................................... 34
6.1 Product Features .......................................................................................................... 34
6.2 Eligibility Criteria for Asset Products ............................................................................. 40
7 Distribution and Communication Considerations .................................................................. 41
7.1 Marketing Objectives of Banks ...................................................................................... 41
7.2 Promotional Activities by Banks .................................................................................... 41
7.3 Distribution Strategy for Banks ...................................................................................... 41

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1
Index of Tables

Table A: Sampling Plan......................................................................................................... 4

Table B: Economic Considerations ....................................................................................... 8

Table C: Summary of Industry Overview ............................................................................. 10

Table D: Cluster Locations for Cotton Ginning Mills ............................................................ 18

Table E: Stake Holders and Their Interests ......................................................................... 21

Table F: Cotton Ginning Raw Material ................................................................................ 22

Table G: Sector Financials Snapshot .................................................................................. 25

Table H: Indicative Equipment Requirement ....................................................................... 28

Table I: Working Capital/Overdraft Finance Facility ............................................................. 35

Table J: Cotton Ginning Machinery Leasing ........................................................................ 36

Table K: Bill Discounting Facility ......................................................................................... 37

Table L: Industrial Power Generator Leasing ...................................................................... 38

Table M: Export Refinance .................................................................................................. 38

Table N: SME Business Bank Account ............................................................................... 39

Table O: Other Products ..................................................................................................... 39

Table P: Asset Products Criteria ......................................................................................... 40

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1

Index of Figures

Figure 4.7-a: Cotton Ginning Process ......................................................................................... 15

Figure 4.8-a: Indicators of Business Success .............................................................................. 16

Figure 4.8-b: Key means of survival as an SME .......................................................................... 16

Figure 5.1-a: Number of years in operation ................................................................................. 19

Figure 5.1-b: Location of businesses........................................................................................... 19

Figure 5.2-b: Age group of business owners ............................................................................... 20

Figure 5.2-a: Education level of business owners ....................................................................... 20

Figure 5.2-c: Number of employees under business owners ....................................................... 20

Figure 5.2-d: Ownership type ...................................................................................................... 20

Figure 5.3-a: Communication with customers ............................................................................. 21

Figure 5.3-b: Number of Suppliers .............................................................................................. 22

Figure 5.3-c: Supplier Relationship ............................................................................................. 22

Figure 5.4-a: Business Model...................................................................................................... 23

Figure 5.4-b: Repayment terms offered by suppliers ................................................................... 24

Figure 5.4-c: Repayment terms offered for customers................................................................. 24

Figure 5.6-a: Business Assets..................................................................................................... 26

Figure 5.6-b: Capital Expenditures .............................................................................................. 26

Figure 5.6-c: Total Revenue ........................................................................................................ 27

Figure 5.6-d: Annual Expense ..................................................................................................... 27

Figure 5.6-e: Net Income ............................................................................................................ 27

Figure 5.8-a: Business Funding Needs ....................................................................................... 29

Figure 5.8-b: Fixed Assets Financing Requirements ................................................................... 30

Figure 5.10-a: Business Expansion Restraints ............................................................................ 32

Figure 5.10-b: How Business Risk is Addressed ......................................................................... 33

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Research Report for ‘Cotton Ginning’ Segment Section
Guidelines for using this Research Report 1

1 Guidelines for using this Research Report

The „Cotton Ginning‟ Segment Research Report provides indicative business and financial
characteristics based on the information derived from a sample of business owners via primary
research survey. It can be used by Banks/DFIs as a starting point for development of program
based lending products for tapping the underutilized potential for providing financing products to
small business owners.

The „Cotton Ginning‟ Industry overview is developed by using information obtained from
secondary and tertiary sources, including industry associations and data available in public
domain.

1.1 Market Assessment

This section contains analysis based on primary findings of survey exercise conducted in major
cotton belt smaller cities of Pakistan, mainly Rahim Yar Khan, Vehari, Hyderabad, Sanghar and
Multan. The survey information can form the basis of identifying the characteristics of a typical
business entity in the segment.

1.2 Product Suite

Proposed banking product suite provides a number of potential core banking products templates
that can be used by Banks/DFIs to design appropriate banking products for gaining access to the
particular segment. However, it is highly recommended that product development undergoes the
usual general practice and protocols employed by the bank. It is also recommended that the
product development and the business line team work together to conduct a quick market
research of a small sample in order to validate the results of this study.

1.3 Marketing and Distribution

Marketing and Distribution considerations are indicative and have been based on the assumption
that banks will employ their individual marketing and distribution strategy for product
development. However, information presented can be utilized by banks for developing certain
hypothesis to be validated for developing their marketing and delivery strategies.

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Research Report for ‘Cotton Ginning’ Segment Section
Introduction & Objectives 2

2 Introduction & Objectives

According to the latest data cited in SMEDA and Economic Survey Reports 2010-2011, Small
and Medium Enterprises (SMEs) account for approximately 40% to GDP contribution of Pakistan
and play a major role in spurring economic activity with a contribution amounting to 80% of non-
agriculture GDP of Pakistan. Majority of the businesses in this segment have used banks for
business needs but remains largely unsatisfied, with few using it as a source of business fund,
owing to the following impediments:

 A different risk profile

 Lack of substantial collateral
 Conservative approach adopted by financial institutions
 Lack of awareness and willingness of banks/DFIs

SMEs present immense business opportunities for financial institutions from the perspective of
increasing book size while generating strong risk adjusted returns, however there is a strong
need to understand the dynamics of this segment in order to enable financial institutions to
structure products that meet overall risk management guidelines and facilitate the growth of this
SME segment.

In this context, State Bank of Pakistan (SBP) has mandated Corporate Development Partners to
conduct a secondary research and a primary survey of ten major SME subsectors of Pakistan to
determine banking and financial needs of the sectors.

This research report contains findings pertaining to the segment of “Cotton Ginning” which
includes cotton ginning factories in Sindh and a major portion covering Punjab areas.

At present, the agriculture segment in Pakistan is relatively unorganized with low growth
momentum, which is a serious blow to the economy as it supports 43.7% of the country‟s labor
force. Government has played a supportive role in providing technological assistance to this
sector but since weather plays a pivotal role in its performance, the growth in agriculture was
only 2.12% against last year‟s growth of 2.88% (Economic Survey of Pakistan 2013-14).

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Research Report for ‘Cotton Ginning’ Segment Section
Introduction & Objectives 2

2.1 Limitations of the Study

 The sample may not be geographically exhaustive.

 The sampling plan may not suit the requirements of every bank.
 Some of the recommendations are not backed by quantitative primary research but are based
on knowledge of the market and best practices.
 Some of the questions in the questionnaire, especially in the financial information section were
considered too personal by many business owners; therefore, many of them refused to
answer. Hence, the responses in this regard may be evasive and cannot be verified with
respect to their accuracy.

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Research Report for ‘Cotton Ginning’ Segment Section
Introduction & Objectives 2

2.2 Sampling Plan

The primary research exercise conducted for identifying the financial needs of the SME segment
was based on the following sampling methodology.

Table A: Sampling Plan

Particulars Criteria Rationale

Size  1,000 detailed  Sample size is sufficient enough to gather relevant

one-on-one qualitative and quantitative information on each sub
interviews for sector
10 sub-  Increase in the sample size will only add marginal
sectors value to the overall information collected from the
 100 SMEs survey exercise
surveyed
within each Change of Definition of SME by SBP
sub sector.
 Small enterprises are defined as those businesses
that have employees up to 20 and annual turnover
up to PKR 75 million
 Medium enterprises are businesses with more than
20 employees and turnover above PKR 75 million
and up to PKR 400 million for the purpose of
classification and segmentation by banks
 For the purpose of this research, the small portion of
medium entities that we have reviewed include
entities that have revenue up to PKR 150 million (i.e.
two times the sales of Small Enterprises)

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Research Report for ‘Cotton Ginning’ Segment Section
Introduction & Objectives 2

Particulars Criteria Rationale

Status  At least 60% will be  Informal businesses would be entities that do

informal businesses not have formal accounting and book keeping
 At least 20% will be system. They do not get their accounts properly
formal businesses audited and are normally not registered under
an official trade/regulatory body.
 A wide majority of businesses operating in
Pakistan are informal businesses in terms of
their quality of record keeping and accounting
information, in the absence of which banks do
not offer them any credit based products.
 A study of informal businesses enables us to
gauge the reasons of these proprietors to
remain within the informal segment and still
compete in the market with formal business
enterprises within the same industry segment.
 Moreover as per revised SME Prudential
Regulations, Small businesses are allowed
financing up to PKR 15 million without the
audited financials. This regulatory change will
enable SMEs to qualify for a structured lending
product by maintaining the basic system of
book keeping and accounting.
 Formal businesses are those entities that are
relatively larger in size and have a proper book
keeping system. These are also registered
businesses that are operating either under an
association of businesses or under a formal
regulatory license, with a fair amount of
transparency in their accounting and book
keeping systems
 Including the above businesses give us a fair
representation of entities that are eligible for all
financial services being offered by banks and
their extent of using banks as their main
financiers and other service providers or only
for holding their business operating accounts
 Formal businesses have more structured
requirements than those who use banks only
for products such as fund transfers

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Research Report for ‘Cotton Ginning’ Segment Section
Introduction & Objectives 2

Particulars Criteria Rationale

Turnover  At least 50%  The corresponding sample mix has been adopted to
with turnover ensure majority coverage of small businesses in the
less than PKR overall sample size since these would be the primary
75 million candidates for programme lending products
 At least 20%  However, for the purpose of understanding the
with turnover financial needs of medium sized entities that are
more than close to the threshold point of small and medium, we
PKR 75 million have covered a minor portion to understand their
requirement for structured loan products as well as
other financial services generally required by
businesses that are relatively mature and larger
sized than small enterprises
Employees  60% will have  SMEs that are not in the manufacturing segment are
less than 20 relatively understaffed owing to the small size of their
employees business and ease of management
 40% will have  Moreover, businesses that have more than 20
more than 20 employees are classified as medium sized hence we
employees have covered a small portion of such entities as well

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Research Report for ‘Cotton Ginning’ Segment Section
Introduction & Objectives 2

Particulars Criteria Rationale

Banking  At least 70%  As per SBP prudential regulations any business

history with banking operated by an individual as a proprietor, but meets
history the classification criteria of the regulations will be
 At least 10% termed under SME
with no  On account of above a majority of sample in the
banking history market are operating their businesses through a
bank account (either in the name of the proprietor or
in the name of the business)
 Most of the financial needs and preferences that are
objectives of this assignment, have been obtained
from the above sample who are using a bank for
their businesses operating needs
 However, a very small portion of the totally
unbanked SMEs in the sub-sector is also covered
during our survey to understand their reasons for not
availing the banking services and fulfilling their
needs for financial services through other, more
expensive, informal channels

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Research Report on ‘Cotton Ginning Segment Section
Economic Overview 3
3 Economic Overview

Pakistan‟s economy has shown resilience despite challenges which include domestic factors
such as political instability during the last few years, security situation and international financial
crisis, in addition to an unprecedented rise in food and energy prices. As per the Economic
Survey of Pakistan (2013-14), after a period of slow growth due to floods and law and order
crisis, the economy showed a significant growth in 2013-14 on the back of immense recovery
from the industrial sector along with moderate growth in agriculture and service sectors. With
industrial sector expanding by 5.84% when compared to last year figure of 1.37%, while the
economy grew by 4.14% in FY-2014.

Table B: Economic Considerations

Positives  Heavily populated, (over 180 MN people) translating into strong

future potential for improvement in work force as well as purchasing
power, leading to growth in consumer related segments.

 Despite many challenges faced by the country, Pakistan has

performed better than many developing countries with the GDP
growth rate of 4.14% in FY 2014 which is highest in the last three
years when compared with GDP growth in FY 2013 and FY 2012 of
3.7% and 3.84% respectively.

 Rising rates of urbanization – with the UN forecasting the proportion

of city dwellers climbing from 34.9% of the population in 2005 to more
than 50% by 2035 – should continue to serve as a key driver of
economic growth.

 The industrial sector showed a huge growth of 5.84% compared to

previous year of 1.37% which has been a huge boost to the economy
as it contributes to 20% of the GDP. It is also a major source of tax
revenue.

 Investment activities are continuing to take place, backed by the fact

that public investment has recorded a remarkable growth of 17.12%
while last year it had a negative growth of 0.35%.

 Foreign Direct Investment (FDI) has also shown a remarkable

increase from USD 1,277 last year to USD 2,979 in the period July –
April 2013-14, an increase by 133%. Major portion of FDI was for oil
& gas exploration, electricity & power, financial business and
chemicals.

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Research Report on ‘Cotton Ginning Segment Section
Economic Overview 3

 Positive trend of remittance over the last 10 years has greatly

supported the country‟s balance of payment position.

Challenges  National saving is showing a decline, with 12.9% of GDP in FY14

while in FY13 it was reported 13.5% of the GDP. Covering the
saving-investment gap remains to be a challenge.

 The FY 2013-14 has shown slight improvement in fiscal deficit which

reduced by 3.2% compared to previous year. Structural weakness in
tax system however still prevails with low tax to GDP ratio while the
expenditures continue to exceed the revenues.

 Balance of payments has shown a surplus of USD 1,938 million

compared to last year deficit of USD 2,090 million in FY 2013-14.
However despite that, the current account balance further showed a
deficit of USD 2,162 million in July-April 2013-14 compared to last
year in the same period.

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Cotton Ginning Industry Overview 4

4 Cotton Ginning Industry Overview

Table C: Summary of Industry Overview

Factors Comments

Due to low production of cotton this year (2013-14) and high cotton
prices in the domestic market compared to international prices, the
Demand demand for cotton exceeds the production. With 5% custom duty
imposed by the Government (April 2014) the import of cotton yarn and
overall import of cotton declined by 31% this year.

Unfavorable weather, water shortages and low profits had been the
main reason behind many farmers showing preference of cultivating
Supply other crops instead of cotton, which resulted in lesser land cultivated for
cotton production. Despite these hurdles, Pakistan managed to export
cotton yarn worth $1.072 billion during the first half of FY 2013-14.

Roomi Cotton Ginning Industries (Pvt) Ltd, Mashallah Cotton Ginning

Key players Mills, P.I.D.C Cotton Ginning Factory (Pvt) Ltd, H&H Cotton Ginning
Factory and Oil Mills

Trade Body Pakistan Cotton Ginners Association (PCGA)

Regulatory Body Ministry of Industries

5% custom duty has recently (April 2014) been imposed by the

Government on the import of cotton yarn which has brought relief to the
local cotton ginning sector. In the start of the year 2014, Pakistan
Recent
became eligible for GSP Plus trade status with the EU which is
Developments
anticipated to increase cotton import and textile export. This may
however result in higher quality stock being preferred by the local mills,
provided the quality of local cotton does not improve.

The segment has shown significant progress over the years and is
Future
expected to continue to reflect growth in the coming years due to high
prospects
prospects in increased production.

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Cotton Ginning Industry Overview 4

4.1 Demand

Pakistan is the world‟s fourth largest cotton

producer and third largest cotton consumer with
domestic consumption fluctuating between 14
million to 16 million bales on average. In order to
meet its local cotton demand, Pakistan needs to
import nearly 2 million cotton bales per year as per
Pakistan Cotton Ginners Association.

Ginning sector has been adversely affected by

electricity crisis which in itself has been one of the
most critcial prevailing problems faced by the
country. Also, the cotton produced in Pakistan is of lower quality due to impurities and
contamination, hence unable to meet the international standard required for exporting cotton.
Pakistan‟s cotton import, therefore, depends upon the size of the domestic crop production and
the export forecasts of the growing textile sector in the country. Generally cotton imports are
about 20% of the countrys‟ cotton demand, with Pakistan‟s textile sector being the largest
customer of the Cotton Ginning sector. Most of the imports are of cotton that is of higher quality
in order to meet the textile industry‟s need.

In FY 2013-14, cotton imports have shown fluctuations with slow imports in the first few months
because of higher import cost due to continuous appreciation in dollar value against rupee at that
time. Later, the recovering of rupee in its value as well as low stock of quality raw cotton in
domestic market led to a surge in the imports. About 2.5 million cotton bales were expected to be
imported by the end of 2013-14 from which 1.2 million cotton bales have already been imported
from India, the second biggest cotton producer, as it provides cotton bales at a cheaper prices,
lower interest and higher quality1. The other countries Pakistan relies on for cotton imports are
US, Argentine and Central Asia.

The overall raw cotton import has however declined by 31% in the first 10 months of FY 2013-
142, according to official statistics quoted in Business Recorder, due to high import of cotton yarn
(9.2 million bales, as cited in Cotton and Products Annual Report 20143) from India. This was
due to cheaper rate offered by India, who has been dominating international cotton market. This
resulted in a large quantity of raw cotton still lying as finished goods in the local mills due to its
low demand.

4.2 Supply
1
http://www.thenews.com.pk/Todays-News-3-234654-Country-likely-to-import-25m-cotton-bales
2
http://www.brecorder.com/cotton-a-textiles/185:pakistan/1188409:raw-cotton-import-declines-by-31-
percent/
3
http://gain.fas.usda.gov/Recent GAIN Publications/Cotton and Products Annual_Islamabad_Pakistan_3-
21-2014.pd
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Cotton Ginning Industry Overview 4

Pakistan reported a decline in its cotton production in

the FY 2013-14 by 2% compared to previous year.
Wet weather conditions during planting season and
tight water conditions with hot dry weather during
sowing stages led to replanting of the cotton seeds by
the farmers. Also low quality seed further affected the
population of the plants as well as the quality of the
crop.

Low cotton production in FY2013-14, has resulted in

not being able to meet the target of 14.1 million cotton
bales4. Also due to pricing and quality reasons, many
farmers showed preference of other crops to sow over
cotton, which resulted in 2.5% less area cultivated for cotton compared to previous year. This
year the production stood at 12.8 million cotton bales, a decline of 9.2% against the target,
according to the Economic Survey of Pakistan 2013-14.

The low production of cotton has led to an increase in the domestic price compared to the
international market. Hence more preference was given by the ginners to sell cotton bales in the
local market than to export.

Despite these conditions, Pakistan has managed to export cotton yarn worth $1.072 billion
during the first half of FY2013-14, with a slight decline of 3% in its exports compared to previous
year5, according to Business Recorder 2014.

Ginning industry operates on seasonal basis due to lack of storage facilities. The absence of
warehouses leads to dust and moisture content being absorbed in cotton bales which in turn
causes motes, and production of bad color lint, which is then priced very low. In terms of
advancement, lack of incentive/demand for clean cotton has translated into poor factory
infrastructure, low quality machines, poor picking, transport, storage and ginning practices.

Cotton ginning process produces cottonseed as a by-product, which goes to oil mills for
extraction of oil, which is further processed into edible oil and cotton seed cake (used as animal
feed). The ginners therefore operate as processors as well as traders concurrently, selling
cottonseeds to oil mills through commission agents. The cotton seeds are sold to the oil mills
through commission agents.

Pakistan's cotton does not attract high value and fetches significantly lower prices than cotton of
similar grades in other countries, due to high level of contamination, inappropriate moisture
content and mixing of different grades of cotton. This causes a serious issue in targeting higher
sales in international market.

4
Economic Survey Of Pakistan 2013-14-Agriculture
5
http://www.brecorder.com/cotton-a-textiles/185/1153567/
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Cotton Ginning Industry Overview 4
4.3 Key Players

The major key players of the cotton ginning sector are Roomi Cotton Ginning Industries (Pvt) Ltd,
Mashallah Cotton Ginning Mills, P.I.D.C Cotton Ginning Factory (Pvt) Ltd, H&H Cotton Ginning
Factory and Oil Mills.

4.4 Trade Body

Pakistan Cotton Ginning Association (PCGA) is the representative body of over 1,200 ginning
factories all over Pakistan and has been working towards the betterment of cotton ginning
industry since 1958.

4.5 Recent Developments

With the start of the year 2014, Pakistan

became eligible for GSP Plus trade
status with the EU6, which is likely to
have a positive impact on the industry
with increasing higher textile export but
also increase in cotton imports to meet
export demands. If the quality of the local
cotton does not show any improvement,
local mills are likely to prefer imported
cotton. Therefore it is of utmost
importance to reduce contamination and
improve the storage infrastructure in this sector.

On the other hand the government has imposed a 5% custom duty on the import of cotton in
April 2014 after exemption of custom duty since 20097, as specified in Business Recorder. The
step was taken after high import of cotton yarn from India, which was hurting the local cotton
ginning industry severely. This may help the local ginners in the near future.

4.6 Future Developments

This segment has a strong dependence on stable economic environment and favorable weather
conditions to prevail in order to achieve high growth levels. Currently the Cotton Ginning industry
is suffering from low production due to various internal and external factors as discussed above.
Some business owners are also concerned regarding the power shortages that they believe is
the main underlying reason for performing below capacity.

6
http://gain.fas.usda.gov/Recent GAIN Publications/Cotton and Products Annual_Islamabad_Pakistan_3-
21-2014.pd
7
http://www.brecorder.com/cotton-a-textiles/625:/1176865:five-percent-duty-imposed-on-cotton-
yarn-import/?date=2014-04-26
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Cotton Ginning Industry Overview 4

Many steps are being taken for performance improvement and growth of Cotton Ginning Sector
such as;

 Ministry of Textile Industry will organize training programs for cotton ginners in Multan,
Bahawalpur and Sukkur to equip them with better understanding and skills in producing
better quality of cotton, as current quality of cotton suffers immensely due to lack of proper
warehousing and storage facility and out dated technology.
 Pakistan is likely to get maximum tariff concessions for its export oriented industry and will
extend non-discriminatory market access (NDMA) to India which will result in increased trade
between the two countries.
 Pakistan Cotton Ginners Association (PCGA) plans to cooperate with several multinational
companies for importing good quality seeds and transfer of technology for ginning industry.
This will lead to increase in the production of cotton as local seed suppliers in the country
provide substandard and less germinated seed to farmers at high rates, which has resulted in
higher loss of production output.

4.7 Cotton Ginning Process

Raw material for ginning factory arrives as phutti in large trailers or modules used for hauling it
from the field and for storing it until ready for ginning (Figure 4.7-a). From the storage area,
conveyor pipes transfer it to various stages of the ginning process, using large volumes of air to
make the flow of the cotton easier and faster, which is first dried in dryers to reduce moisture.

Cylinder Cleaner: It removes leaves and other small trash from phutti by shaking it with spiked
cylinder.

Stick Machine: Removes large sticks or hulls with revolving channel saws. These saws grab the
seed cotton and whip it over metal bars to sling off its trash.

Humidifier: With unusually dry cotton, gins will skip

the drying stage and will, at times, add moisture to it
with a special humidifier that blows warm, humid air
through the gin's conveyor pipes.

Saw Gin: The seed cotton is now ready for ginning.

Pima cotton is conveyed to the roller gin, while
upland cottons are conveyed to the saw gin for
separation of seed and fiber.

Lint Cleaner: It removes the small trash from the ginned lint left behind by the cylinder cleaner
and stick machines. Lint cleaning of roller ginned cotton usually involves a combination of three
machines: a cylinder cleaner, an impact cleaner, which uses cylinders to agitate and release the
trash from the lint, and an air-jet cleaner which removes the trash from the lint using high velocity
air.

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Cotton Ginning Industry Overview 4

Hydraulic Cotton Bailing Press: compresses the ginned lint into bales that weigh between 450
and 500 pounds. These bales are then wrapped with a protective cover, ready for delivery to the
warehouse from where they are sold to various textile mills.

Figure 4.7-a: Cotton Ginning Process

Seed Cotton
(Phutti)

Mixing

Pneumatic
Conveyor

Opener/ Pre-
cleaner

Saw Gin Cotton Seed

Lint Cleaner

Pre-bale
Press

Bale
Cotton Bales
Press

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Cotton Ginning Industry Overview 4

4.8 Success and Survival of the

Businesses in this Sector
Figure 4.7-a: Indicators of Business
From the survey interviews (Figure Success
4.7-a), almost half of the business
60%
owners felt that good relations with 53%
50% 46%
the suppliers (46%) and timely
delivery of the finished goods (53%) 40%

were the major success factors for the 30%

businesses in this sector as this 20% 17%

ensured consistent supply of raw 10%

3%
1%
material and so no loss of orders. 0%
Cost & efficiency Good relation with High profit margin Product innovation Timely delivery
the suppliers and diversity
In order to survive as an SME (Figure
4.8-b), 60% of the business owners
believe that experience was the most Figure 4.8-b: Key means of survival as
an SME
essential element, followed by
education, by 36% of the business
70%
owners. However, 19% of the 60%
60%
business owners also felt that due to
50%
favorable government policies their
40% 36%
SME businesses managed to survive.
30%
19%
20% 15%

10%

0%
Education Experience Favorable Strong supplier
Government policies customer relations

Source: Survey Findings

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5 Market Assessment

5.1 Market & Demographic Profile

Cotton production plays a significant role in Pakistan‟s agriculture and economic growth.
According to Economic Survey of Pakistan 2013-14, cotton has a share of 1.4% in Pakistan‟s
total GDP and a 6.7% share in agriculture.

Cotton production is mainly concentrated in two provinces: Punjab and Sindh, therefore majority
of ginning units are established there for easy availability of raw material. There are over 1,200
cotton ginning units with approximately 60% ginning units located in Punjab and 40% units in
Sindh. Many of these units (around 20%) are non operational due to various factors but mostly
due to low availability of cotton and power shortages. Most businesses are either family owned
or established by the owners themselves. Underlying issues inherent to this segment include:

1) Inability to assemble and deploy intellectual, human and financial resources effectively
2) Lack of vision for growth
3) Limited perception of business requirements
4) Restricted funding sources
5) Inability to identify and explore new ideas
6) Lack of technical institutions and skill development programs
7) No quality certification and testing facilities

The businesses use outdated technologies with only few large manufacturers using sophisticated
technology whereas, small and medium sized manufacturers employ limited technology. The
main reason for lack of automation and mechanization in this segment is due to unavailability of
funds to the small manufacturers for purchase and installation of such machinery.

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5.1.1 Market Sizing and Lending Potential

Businesses in the segment are widespread throughout various locations in rural areas (Table D).
The Rahim Yar Khan and Multan clusters are highly decentralized and vary in terms of sizes.
The small and unorganized units are located in congested areas mentioned below which is not
accurate but an estimate. “Others” include many small cities with very few mills established but
the combined numbers are large.

Table D: Cluster Locations for ‘Cotton

Ginning’ Mills

Area No. of establishments

Rahim Yar Khan 149
Vehari 92
Multan 76
Khanewal 50
Muzaffar Garh 43
D.G khan 33
Lodhran 52
Sanghar 87
Hyderabad 35
Nawabshah 42
Mirpurkhas 31
Others 564

Source: Trade Associations and Industry Sources

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5.1.2 Segment Demographics

The segment is widely spread out across various regions in the country with highest
concentration in Punjab. Demographic information is obtained from industry sources and primary
research conducted using a selected sample of businesses in major cities of Pakistan. Majority
of the businesses in our survey (40%) have their businesses serving all over Punjab while 12%
and 10% businesses are in Multan and Vehari respectively (Figure 5.1-b).

40% of the businesses have been in operation between 5 to 10 years while 25% have been
operating for more than 10 years, with the businesses either being established by the owners
themselves or run as a family business (Figure 5.1-a).

Figure 5.1-a: Number of years in

operation

1 to 3 years, 5%

More Than 10
years, 25%

3 to 5 years,
30%

5 to 10 years,
40%

Figure 5.1-b: Location of businesses

50%
44%
45%
40%
35%
30%
25%
20%
15% 12%
9% 10%
10% 7% 7% 8%
5%
5% 1%
0%
Multan Hyderabad Karachi Khanewal Punjab Rahim Yar Sindh Vehari All over the
Khan country

Source: Survey Findings

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5.2 Owners Profile

Majority of the business owners‟ fall in age group of 31-40 years (48%) and between 41-50 years
(47%) respectively (Figure 5.2-b). Leading drawbacks of this industry is the lack of skill and
technical knowledge and therefore there is a need to bring improvement in the techniques for
better quality of cotton production. The highest level of education for 67% of the business owners
is high school while only 26% have college/bachelor degree (Figure 5.2-a).

47% of the businesses in our survey consist of 10-24 number of employees while 24% of
businesses only have between 5-9 employees (Figure 5.2-c). It can be deduced from this that
business size in this sector mostly vary between medium to small with 75% of the businesses
running as individual/proprietorship while 23% as partnership (Figure 5.2-d).

Figure 5.2-a: Education level of Figure 5.2-b: Age group of business

business owners owners

Primary School
Post Graduate, Completed, 4% Some Primary
51-65, 4% 21-30, 1%
1% School, 1%

No Education,
1% College/Bachelor
Degree, 26%

31-40, 48%

41-50, 47%

High School, 67%

Figure 5.2-c: Number of employees under Figure 5.2-d: Ownership type

business owners

Private Limited
51+, 6% 0-4, 4% Company, 2%

5-9, 24%
Partnership, 23%
24-50, 19%

Individual/propri
etorship, 75%

10-24, 47%

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5.3
Source:Business Linkages
Survey Findings

Businesses in the segment are connected to various institutions, which are directly or indirectly
affected by the business operations. Primary stake holders and their interests are enlisted in the
following table (Table E).

Table E: Stake Holders and Their Interests

Cotton Ginning

Stakeholder Interest

Owners Growth, government initiative and access to finance

Suppliers (farmers) Better terms, increased supply, consistent pricing and lower risk
Customers Product quality and reasonable pricing
Financial Debt servicing, new products, increase in deposits
Institutions
Government Expansion of taxation bracket, economic growth, benefit to
community at large

Businesses employ various means of communication with customers however, for majority of the
businesses; personal visits (71%) by customers and telephone (79%) are widely utilized (Figure
5.3-a). Most of the businesses survey face stiff competition with almost half of them having about
four to five competitors while the remaining having more than ten competitors within their market.

Figure 5.3-a: Communication with

customers

90%
79%
80% 71%
70%
60%
50%
40%
30%
20% 12% 11%
10%
10%
0%
Email Fax Personal Visits Telephone Visits by an
Employee

Source: Survey Findings

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Major supplies (Table F ) for segment include:

Table F: Raw Material for Cotton Ginning Sector

Raw cotton (Phutti)

Cotton seed
66% of the businesses depend on many suppliers (Figure
5.3-c) to meet their inventory needs while only 13% depend
on the same suppliers for years which depicts difficulty for
many businesses in fulfilling their material needs when
required. 11% of the businesses are not consistent in their
suppliers to meet their raw material requirements while 12%
of the businesses need new suppliers due to inconsistent
quality of stock supplied. As depicted below (Figure 5.3-b)
69% of the businesses depend on about two to five suppliers
while 29% are dependent on more than five suppliers.

Raw material needs are mostly met through local farmers

who supply raw cotton to ginning factories. Very few establishments buy from the same available
farmers or require different ones due to inconsistent supplies as mentioned above. Some ginning
factories in this sector have their own farms for cotton cultivation but may still depend on few
suppliers for raw material to fulfill any.

Figure 5.3-b: Number of Suppliers Figure 5.3-c: Supplier Relationship

More than One, 2% 66%

70%
five, 29%
60%
50%
40%
30%
20% 13% 11% 12%
10%
0%
Rely on the same Not consistent in Depend on many Need new
supplier for meeting business to meet business suppliers due to
material needs material needs material needs inconsistent
material quality
Two to Five, supplied
69%

Source: Survey Findings

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5.4 Business Cycle

The cycle from raw cotton cultivation to processing it into cotton bales and then being sold in the
market is a lengthy procedure depending on many factors such as weather, government policy
on import/export, quality of cotton, availability of supply, etc.

Many ginning factories rely on many farmers for their raw materials, which leads them to at times
compromise on quality of raw material (Figure 5.4-a).

This sector is seasonal with huge dependence on favorable weather condition for high
production and quality cotton. „Cotton Ginning‟ mostly suffers from rising cotton prices and low
cotton quality compared to international standards which results in reduced sales.

Figure 5.4-a: Business Model

Farmers

Owned farm
Buyers

Open Cotton Ginning and

market/Wholesalers Pressing

Customers

The „Cotton Ginning‟ segment of

Pakistan consists of farmers who sell
their seed cotton to village merchants or
local market. The seed cotton is then
grouped together to grade them, based
on their quality. The cotton from different
farmers may be mixed prior to
transporting them to the ginning factory.
The cotton bales, as end products, are
then weighted and graded which are
then sold to various customers. Textile
factories are the biggest customers who
have fixed contract with many ginning factories and so is a real source of income for the
businesses in this sector.

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5.4.1 Working Capital

Working capital is dependent upon payment terms offered to customers and received from
suppliers. Businesses in cotton ginning segment operate by manufacturing cotton bales for
different companies.

The segment works mainly on cash basis, with most of the businesses allowing up to 1 month
(84%) for large/reputable customers due to strong client/customer relationship (Figure 5.4-c). In
some instances, as stated by 13% of the businesses surveyed, collection from the customers
may take up to three months.

The credit terms provided by the suppliers (Figure 5.4-b) ranges from as low as 10 days to as
high as 5 months. This may cause problems in cash management for some businesses where
payments to be made to the suppliers are earlier than payments received from the customers.

Figure 5.4-b: Repayment terms offered Figure 5.4-c: Repayment terms

by suppliers offered for customers

No credit, 3%
4 Months, 1% 5 Months, 1%
3 Months, 8% 3 months, 13%

20 Days, 5%

1 Month, 36%

2 Months, 26%

10 Days, 1%

1 month, 84%
15 Days, 21%

Source: Survey Findings

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5.5 Financial Assessment and Profile

As per the survey, all the businesses in this segment prepare Financial Statements, however,
only 43% of the business owners have their Financial Statements audited.

Mostly General Managers or accountants keep track of accounts of the businesses, due to their
accounting knowledge and experience. A good number of businesses are getting their Financial
Statements audited, which gives reliability in preparation of their accounts and ensures, to some
extent, an organized track of cash movement.

From primary research and interviews conducted from trade associations, it has been identified
that retailer margins are variable which in recent year has been rising, with a great number
relying not only on higher sales volume for earning better profits but also giving preference to sell
locally instead of export, due to lower international price.

As per research findings, none of the business owners in the sector were willing to disclose their
financial data with regards to capital invested. A rough estimate was given by the business
owners regarding business assets employed, annual revenue, income and expenses.

Business owners‟ reluctance for sharing financial information presents an issue for calculation of
segment‟s accurate benchmark financial ratios. The following table (Table G) provides key
financial ratios of this sector, which have been calculated on the average value of the financial
range provided to us by the businesses covered in the survey. These ratios are an estimate at
best and cannot be utilized to assess the performance of the businesses prevailing throughout
this sector.

Table G: Sector Financials Snapshot

Financial Information PKR

Business Assets 25,800,000
Total Revenue 104,490,000
Annual Expense 89,830,000
Net Income 14,660,000
Key Financial Ratios
Profit Margin 14%
Operating Expenses/ Revenue 86%
Asset turnover 4.05 times
ROA 57%
Conclusively, this sector has a high asset turnover which indicates that for every one rupee
invested, the business generates sales of four rupees. Further, this segment is also highly
dependent upon machinery and equipments updation, the investment in which, can increase the
profitability of the businesses by many folds. The banks can pay special focus on devising
banking products for financing equipments for this sector.

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5.6 Financial Information

Primary survey findings reflect the Total Average Capital, Assets, Revenue, Expenses and
Income under the selected sample for the segment.

Survey findings demonstrate 79% of businesses are operating with Capital (Net Worth) and Total
Assets between PKR 10-50 million (Figure 5.6-a). This exhibits a relatively high initial investment
for startup. Total assets comprise of plant and machinery, land and building, inventory and
receivables. Liabilities constitute trade payables and borrowing for working capital finance.

Business related assets constitute manufacturing equipment, specialized machinery and office
equipment. More than half of the businesses (57%) in this sector have incurred capital
expenditure in the past five years (Figure 5.6-b).
No, 43%

Figure 5.6-a: Business Assets Figure 5.6-b: Capital Expenditures

Yes, 57%

Less than PKR 10

MN, 21%

No, 43%

Source: Survey Findings Yes, 57%

PKR 10 – 50
MN, 79%

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50% of the surveyed entities reported annual revenue between PKR 10-50 million, while 47%
entities reported their revenue of more than PKR 100 million (Figure 5.6-c). Expenses include
material, employee cost and interest expenses against borrowings which are between PKR 10-
50 million for half of the businesses while 41% have their expenses more than PKR 100 million
(Figure 5.6-d).

Figure 5.6-c: Total Revenue Figure 5.6-d: Annual Expense

PKR 10 – 50
MN, 50%
More than PKR
100 MN, 41%
More than PKR
PKR 10 – 50
100 MN, 47%
MN, 50%

PKR 51 – 100
PKR 51 – 100
MN, 9%
MN, 3%

Source: Survey Findings

All businesses display healthy earnings (Figure 5.6-e). Only 12% of business owners earn
between PKR 6-10 million, while rest of the business owners show net earnings of more than
PKR 10 million.

Figure 5.6-e: Net Income

PKR 6 – 10
MN, 12%

More Than PKR

10 MN, 88%

Source: Survey Findings

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5.7 Indicative Business Requirements

The following table (Table H) lists the business equipment required by the businesses in the
„Cotton Ginning‟ sector. The values provided below are susceptible to volatility in market prices.
In addition, individual business owners will have distinctive requirements as per their business
needs. The table below is neither comprehensive nor specific and provides only an indication as
to the typical requirement for set up or the expansion needs of a small sized business within this
segment.

Table H: Indicative Equipment Requirement Cost PKR

Saw ginning Machines 7,000,000- 12,000,000

Lint Cleaners 1,500,000
Cotton Seed Cleaning Machine / dust Remover 5,000,000
Seed Saw tooth Delinting Machine 4,000,000 – 12,000,000
Cotton Conveyor belt 2,000,000
Hydraulic Cotton Bailing Press 7,000,000– 15,000,000
Humidifier 10,000
Weight Bridge 20,000,000 – 40,000,000
Vacuum Separator 500,000
Condenser 400,000

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5.8 Financial Need Analysis

Funds are mostly managed by General Managers or accountants with very few business owners
managing funds themselves. Business assets and working capital are mostly fulfilled by loans
from banks or cash flow from their business. Some business owners also use their own savings
to meet their funding needs. Among the fixed assets, finance requirements are mainly centered
on machinery and equipment of the business, as stated by 87% of the businesses (Figure
5.8-b).

Almost all of the businesses (91%) opted working capital as their primary business funding
(Figure 5.8-a) need from which Letter of guarantee (LG) for the purchase of raw materials or
finished products and Finished Goods was the most preferred.

The segment is keen to use banks for routine business needs and has been using banks for
certain banking products; however, the businesses operating in the segment did not have any
significant awareness and therefore did not have an encouraging response towards lending
products or to have a more far reaching relationship with banks and financial institutions.

This sort of reluctance with respect to bank financing products can primarily be attributed to lack
of communication between the business owners and banks, as well as limited knowledge of
potential customers/business owners with respect to existing or potential products that may be
offered by banks. The banks can successfully expand their target market by educating the
business owners to utilize banking products. The banking products need to be customized
/structured to suit the specific needs of the business.

Figure 5.8-a: Business Funding Needs

100% 91%
90%
80%
70%
60%
50%
40%
30%
20%
4% 7%
10% 1% 2%
0%
Business vehicle Long term project financing Trade financing Working Capital/
financing equipment Overdraft
financing

Source: Survey Findings

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Figure 5.8-b: Fixed Assets Financing
Requirements

100%
87%
90%
80%
70%
60%
50%
40%
30%
18%
20% 14%
10% 4%
0%
Buildings Furniture and Fittings Machinery and Office and Busines
Equipment Equipment

Source: Survey Findings

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5.9 Usage of Banking Products

The owners are mostly unaware of any SME segment specific efforts made by the Government
of Pakistan; however, few business owners are receptive to potential loan products offered by
banks and have also availed the facility of loan for business funding needs.

Many business owners use banks to meet banking and business needs, availing the facility of
business banking accounts, but the owners are not keen to propose any feature or product to be
offered by the bank.

33% of the segment use banks as their source of funding, the second most sought out
preference after their own saving, which is encouraging. The remaining business owners who
have never approached banks for loan cited high interest rates, strict demand for collateral, bank
charges, documentation and religious reasons.

Other services provided by the banks, namely cash management, money transfer, and payroll,
are also required by the businesses in this sector. Majority of businesses in the survey showed
interest in availing cash management services, whereas money transfer and payroll services are
desired by few.

20% of the respondents reported to have not availed any insurance for their business. The rest
have insurance for motor vehicle, equipment and medical aid. More than 80% are not interested
in availing any insurance product from banks in future as they prefer to avail such products
directly from insurance companies.

The sector only consist of 6% of the businesses who avail advisory services and pay for it, the
rest avail it from their family members and colleagues on a non-professional basis with almost
half of them being satisfied with their current source of advisory services. None of the business
owners are willingly to pay for such services if provided by the banks.

Banking Product Usage Percentage

Deposit (Checking) Account 72%
Term Deposits 26%
Loan Product 32%

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5.10 Segment Risk Considerations

The SMEs in this sector are highly risky as compared to some of the other businesses operating
in Pakistan in terms of survival and other uncontrollable factors such as weather, as indicated
through the prevailing market condition. This segment has however continued to show its
presence in both the local and even the international market, the underlying reason being the
country‟s strong agricultural base, with many established businesses generating healthy profits
over the years. More than half of the owners are operating from owned factory. However, some
risks that pertain to this segment are discussed below.

Businesses in the segment are largely individual proprietorships having this business as the only
source of income. Almost half of the businesses are operating from rented premises, therefore
incurring high fixed cost. The sector mostly listed non-repayment of loans taken from banks as
their biggest risk to the business, followed by inflation, with the percentage resting at 64% and
34% respectively.

All businesses in the sector prepare Financial Statements but less than half of the businesses
have an audit of their financial statements. The analysis also demonstrates that the segment
operates in a highly competitive market with more than half of businesses having more than ten
competitors. The majority of business entities in the segment rely on the same suppliers for a
number of years to meet material needs; unavailability of raw material from the selected
suppliers can cause a problem if required to switch to a new supplier.

More than 70% of the businesses address these risks through more capital investment (Figure
5.10-b), while 10% of the businesses also focus on manpower training. Due to lack of raw cotton
storage facility only 6% of the businesses address their risk through inventory management. 73%
of these businesses feel that lack of access to finance restricts them in business expansion while
16% felt shrinking market was also the cause (Figure 5.10-a).

A large proportion of SMEs in the segment do not use banks to meet business funding needs
and are not paying for any insurance products.

Figure 5.10-a: Business Expansion

Restraints
80% 73%
70%

60%

50%

40%

30%

20% 16%
8%
10% 5%

0%
Access to finance Lack of Infrastructure Regulatory/ policy Shrinking market
issues

Source: Survey Findings

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Figure 5.10-b: How Business Risk is
Addressed

80% 75%

70%

60%

50%

40%

30%

20%
10%
10% 6% 6%
3%
0%
Capital Inventory Manpower training Product Reduction in profit
management innovation/cost margin
reduction

Source: Survey Findings

Following are the strengths and weaknesses inherent in this sector:

Strengths

 Raw material locally available

 Strong agriculture base in the country
 High capacity for high production
 Huge export potential

Weaknesses

 Outdated technology
 No technical training institute for Ginning Industry
 High contamination in the crops
 Low pest control

Further, the risks inherent to the segment include:

 Uneven cash flows

 Limited resources for expansion
 Business uncertainty due to changing import and export policies
 Unaudited financial statements
 Employee turnover
 Lack of succession planning

Possible Mitigating Factors:

 Lending only to those businesses which have been operating for more than five years
 Proposing products to business with a verifiable banking history of more than two years
 Review of accounts and register of invoices
 Review of ownership documents of business premises

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6 Proposed Banking Product Suite

6.1 Product Features

Based on our primary and secondary research we propose the following for economic growth of
„Cotton Ginning‟ sector:

Asset Products:

 Working capital/overdraft Finance Facility

 Cotton ginning machinery leasing
 Bill Discounting Facility
 Industrial Power Generator Leasing
 Export Refinance

Liability Products:

 Business Bank Account

Other products

 Banc assurance
 Branchless Banking (Mobile)
 Utility Bill Payment

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Table I: Working Capital/Overdraft Finance Facility

Particular Details

Initial deposit Minimum initial deposit of PKR 10,000

3 years with no requirement of Annual Cleanup for principle amount.

Tenure
However, regular payment of markup is must for renewal of limit.
 Minimum Limit - PKR 1,000,000
 Maximum Limit - PKR 50,000,000
 Minimum and maximum loan limits are reviewed annually
Loan Limit Total loan limit offered will not exceed an average six months of usage
determined over a period of the last three years.
(Maximum limit is set based on 50% mark-up of average revenue estimated for this
sector)
One time documentation (as required by banks) for a period of three
Documentation
years

 Flexible repayment conditions: lump sum payment on the due date or

Repayments &
partial repayments
Withdrawals
 Multiple withdrawals are allowed during the tenure of loan

Borrower is liable to clear the entire loan amount, both principal and
Cleanup markup, once in a year on a date indicated by the borrower & mutually
agreed by the bank

Markup As per prevailing KIBOR and spread

Markup charges Mark up will be charged only on the amount utilized by the borrower

Renewal will be on the basis of fresh application, subject to clearing of

Renewal
entire loan amount including markup and satisfactory credit history

No early repayment penalty may be imposed on the borrower (subject

Penalty
to banks discretion)
Insurance Mandatory insurance as per SBP guidelines
Raw material stock. Mortgage of business premises for those who
Security
operate from owned premises.

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Table J: Cotton Ginning Machinery Leasing

Particular Details

Initial deposit Minimum initial deposit of PKR 50,000

 Equipment & machinery leasing will be provided for business

expansion only to businesses who have been operating for 3 or
more years
Salient Features  A list of pre-approved equipment and machinery manufacturers will
be developed based on information received from trade association
and market intelligence
Disbursement directly made to pre-approved equipment and
machinery vendors on behalf of borrower
Tenure 3 - 5 years

 Minimum Limit - PKR 2,000,000

Loan Limit
 Maximum Limit - PKR 50,000,000

 One time documentation required for a period of three years

Documentation
 Financial Statements
Repayments &
Repayments will be based upon preset Equal Monthly Installments
Withdrawals

Markup As per prevailing KIBOR and spread

Penalty As per existing bank policies and cost of charges

Insurance Mandatory insurance as per SBP guidelines

5% of invoice as security deposit and hypothecation of leased
Security/Collateral
assets. Provision of collateral as per satisfaction of the bank

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Table K: Bill Discounting Facility

Particular Details

Indicative Tenure 3 years

 Minimum Limit - PKR 1,000,000

 Maximum Limit - PKR 5,000,000
 Minimum and maximum loan limits are reviewed annually
Loan Limit
Loan limit will not exceed more than six months of sales to approved
vendors determined over a period of last three years. More than 50%
of sales of business have to be under contract to approved vendors.
Documentation Detailed documentation

Approval Approved on basis of business proposal and RMG guidelines

Collateral Sales invoice payments deposited directly to Bank

Markup As per prevailing KIBOR and spread

Penalty No early repayment penalty will be imposed on the borrower

Hidden Charges No hidden charges

Insurance Mandatory insurance as per SBP guidelines

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Research Report on ‘Cotton Ginning’ Segment Section
Proposed Banking Product Suite 6

Table L: Industrial Power Generator Leasing

Particular Details

Down Payment Minimum down payment of 20%

 Loan amount will be directly transferred to suppliers‟ accounts

against invoices
Salient Features  Credit facility will be offered directly through pre-approved generator
suppliers

Tenure 3-5 years

 Business Financial Statements

Documentation
 Proof of business operation for last three years

 Minimum Limit - PKR 500,000

Loan Limit  Maximum Limit - PKR 10,000,000

Repayments &
Repayments will be based upon present Equal Monthly Installments
Withdrawals

Markup As per prevailing KIBOR and spread

Insurance Mandatory Insurance facility as per SBP guidelines

Penalty As per existing bank policies and cost of charges

Table M: Export Refinance

Particular Details

Initial deposit Any form of collateral/guarantee which the bank feels fit.

Tenure Depends on the contract terms of LC

One time documentation required for a period of three years which
Documentation may include financial statements, company incorporation documents
etc.
Markup As per prevailing KIBOR and spread

Penalty As per existing bank policies and cost of charges

Insurance Mandatory insurance as per SBP guidelines

Security As per the requirement and satisfaction of bank.

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Research Report on ‘Cotton Ginning’ Segment Section
Proposed Banking Product Suite 6

Table N: SME Business Bank Account

Particular Details

Account Type Non- remunerative Current Account

CNIC/smart NIC, completion of KYC requirements as per SBP

Documentation
Regulations
 Cheque Book
 Upgraded ATM facilities
 Business Visa Debit Card
Facilities  Phone Banking
 Mobile Banking
 Internet Banking
 Monthly account statement

Table O: Other Products

Particular Details
Bancassurance products such as Business Premises Insurance,
Personal Injury Insurance, Equipment and Vehicle insurance can be
Banc-assurance
proposed by banks through its channels offering reasonable rates
and servicing through banking channels such as direct debit

Branchless Mobile banking services for instance balance check, bill payment
Banking (Mobile) and funds transfer

Utility Bill Payment Service for easy payment of electricity, gas, telephone and cell
phone bills

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Research Report on ‘Cotton Ginning’ Segment Section
Proposed Banking Product Suite 6

6.2 Eligibility Criteria for Asset Products

Table P: Asset Products Criteria

Indicators Description
During assessment of customers, take into account the total indebtedness of
Borrower the potential borrower, his disposable income and ensure that the total
Eligibility financing to customer does not exceed the prescribed limits as laid down in
Analysis approved policies of bank. Borrower should be in business of „Cotton Ginning‟
for the past three years and hold a valid CNIC/smart NIC.
To assess the Borrower‟s position, verification of their revenues can be
Business
verified by the bank. Business premises ownership documents should be
Analysis
verified against name of the owner.
Credit Credit worthiness of the borrower may be ascertained by collecting
worthiness information from e-CIB or other credit information bureaus.
Financial To assess average expenses, income generated and repayment capacity of
parameters the borrower.
Adherence to To assess that Customer/ Borrower requirements are in compliance with
Lending standards set for revolving finance scheme by the Bank and/ or Regulatory
Standards Authorities.
Banking
Verifiable banking history of more than one year with active accounts
History
Business should be in operation for more than three years. If the business is
Business
involved in exporting their finished goods then they should be involved in
Operations
export business for the last 3 years.
Trade body
Business should be a member of the sector‟s trade body.
membership

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Research Report on ‘Cotton Ginning’ Segment Section
Distribution and Communication Considerations 7

7 Distribution and Communication Considerations

SMEs in „Cotton Ginning‟ are spread out mostly in Punjab in various clusters; therefore they can
be reached and targeted in major clusters to promote banking products.

7.1 Marketing Objectives of Banks

Marketing objectives for building and promoting the brand image of SME Products for cotton
ginning manufacturing are as follows:

The banks may:

 Educate the cotton manufacturers, create awareness for financial needs and banking
products in the identified market regions
 Develop strategies to attract a large number of cotton manufacturers interested in product
schemes
 Design a comprehensive positioning strategy to create strong perception of the cotton
segment lending product in the market

7.2 Promotional Activities by Banks

To create awareness of SME specific products in the target market, the banks may aggressively
advertise their banking products through various promotional programs and events:

– Conduct workshops to create awareness amongst cotton ginning sector business owners
with trade associations to provide maximum exposure to business owners
– Organize promotional events to build strong image of the bank among the target audiences

Banks can service these SMEs through the following proposed channels: (Please note that this
list is not exhaustive):

 Direct Sales Agents

 Tele Sales
 Trade association backed seminars
 Branches in cluster locations

7.3 Distribution Strategy for Banks

As primary means of customer service and sales interaction, distribution channels play a central
role in the customer relationship process, which improves growth. Banks‟ challenge is to improve
and integrate their multiple distribution channels to consistently deliver an enhanced experience
and foster better customer relationships. Top priority is placed in attracting and retaining
customers within and across these channels.

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Research Report on ‘Cotton Ginning’ Segment Section
Distribution and Communication Considerations 7

To reach maximum percentage of target market, Banks need to have a comprehensive

distribution strategy. Banks should aim to cater banking needs of cotton ginning sector through
its products in major cities of the country where cotton ginning units are located. Initially the
banks may provide financing facility in main cities of the country but will however penetrate into
other small business markets after establishing strong presence in major cities.

Banks may adopt following conventional channels for distribution:

 Direct Sales Agent: This activity may be outsourced and a trained marketing team should
periodically visit identified areas within the cities, to educate potential customers and create
awareness of the products and services being offered under SME Products Suite.
 F2F interactions: A deeper level of interaction may provide an integrated customer focus, by
relationship managers involved in face to face interaction, which will become critical in
helping better communication for product awareness and in addressing hesitations faced by
the business owners.

Following Technology based alternate delivery channels can also be adopted for distribution

 Internet Banking: With technology up gradation mobile phones have become sophisticated
and capable of handling advanced applications and services, so banking via mobile phones
appeal to consumers on multiple fronts.
 Short Message Service (SMS): Marketing team can send out mass messages in Urdu or
English to „Cotton Ginning‟ segment for advertising bank‟s products.

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