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Rule bars banks and DFIs' investment in unsecured instruments

KARACHI (January 30 2004): The new set of Prudential Regulations for banks and development financial institutions (DFIs) designed by the State Bank of Pakistan (SBP) bars them from investing in unsecured debt, including unsecured term finance certificates (TFCs) beyond a limit of Rs 500,000, according to financial experts.

The central bank in 2002 allowed banks to issue unsecured term finance certificates for tier-II capital to increase their capital adequacy ratio. Other banks could invest in these instruments, but the amount was deducted from the investing bank's equity, and given a risk weightage of zero while calculating capital adequacy ratio.

The new rules barred banks as well as DFIs from investing in any unsecured debt instrument, including investments in Tier-II TFCs of banks.

The confusion kept several potential investors from subscribing in the IPO of the recently concluded Union Bank TFC issue. The bank raised Rs 600 million through private placement and Rs 150 million through a public offering.

The public offering was under-subscribed with Rs 106 million raised against an offering of Rs 150 million.

Future Tier-II issues of banks may not find ready investors as institutions that normally provide liquidity and trading support in listed TFC issues may not be able to invest in them.

Several Tier-II issues were successfully placed in the market in 2003, including MCB, Bank Al-Falah, and Union Bank's First Issue. Currently, Bank Al-Habib is also considering raising funds through unsecured TFC issue.

Financial experts wanted the central bank to remove this anomaly to help boost investment in upcoming TFCs.

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