Are investors and borrowers taking to new financing modes? The answer, analysis of the financial sector and the capital market confirms, is “yes.” Noticeably its coming about at a time when the State Bank of Pakistan (SBP) has eased the monetary policy and banks have accumulated piles of liquidity.
All banks, including state-owned and private, as well as foreign-based, are beset with these problems, as credit offtake by private business and industry has not picked up.
It is also true that a major slashing of the lending rates that has taken place in the last few months, has gone to the benefit of potential blue-chip and big corporate borrowers, as well as financially sound projects. But, interest rates for the small fries are still close to 10 per cent. Financial analysts feel that it is the small, and new borrowers, the banks should have gone after. But, strange are the ways of Pakistani bankers who are not accustomed to “market” credit or innovate with new instruments and products.
The latest favourite mode seems to be the term finance certificates (TFCs). These are being more often floated than ever before. TFCs also are the instruments that are being heavily oversubscribed as investors shift their sights and gears away from the traditional instruments and financial sources. A vast variety of borrowers -ranging from leasing companies to textiles mills-have floated TFCs in just these past weeks. The trend gets strengthened, and goes on, almost continuously.
The first nine months of the current fiscal 2003, have seen 18 TFCs collecting Rs9.5 billion. This fiscal started at an upbeat note for TFCs. In the first quarter eight TFCs were offered for a total amount of Rs4.6 billion.
The second quarter saw the number of TFCs decline to only three with an amount of Rs2.2 billion. But, the number, once again, rose to seven in the just-ended third quarter with an amount of Rs2.66 billion. These seven issues have 'A' category rating, and were over subsribed. Their coupon rate is in a 11 to 12 per cent range, concurrent to their tenor, that market analysts describe as “healthy.”
The capital market records indicate that an average Rs 5 billion were raised annually in the last three years that have seen a total of 22 TFCs coming into the market.
The trend comes in the wake of spiralling stock market scrips as only weeks ago the benchmark Karachi Stock Exchange KSE-100 index rose beyond 2,900 although it later started moving in the 2500-2700 range. These shooting, and expensive scrips that had gone up chiefly because of a continued shortage of good shares, as well as crashing down profit rates offered by banks, and interest rate reductions, led prospective investors search for new avenues. These included the forgotten, as well as dormant, and unconventional avenues in a country whose financial sector moves only on dotted, even less fruitful, lines. There is hardly an iota of effort by any market player and stockholder to innovate or go for new and greener pastures.
As of this week, the overall value of the listed TFCs is Rs 28 billion . The total amount until December 31, 2002 was Rs25 billion. Will the TFC boom go on? The market trends indicate that it most probably will, barring a financial miracle that opens up newer fields.
Financial market analysts estimate that there still is a very big demand gap and the TFCs can absorb a lot more investment in the prevailing capital market scenario. In the weeks to come, several other borrowers are planning to issue TFCs. Market sources point out that these are likely to include more leasing companies, textile mills, as well as Ittehad Chemicals.
The textile sector was the key borrower through TFCs in the the third quarter when three textile and spinning mills-Gulshan, Paramount and Gulistan- launched the certificates for Rs1.0 billion. They were followed by leasing companies, also three in number, and included Paramount, Security, and KASB, with a combined Rs824 million intake.
Textile units were prominent in TFC borrowing in the third quarter, but leasing companies have generally dominated the scene for these certificates. Quetta Textiles had launched TFCs in October, Union Bank and Abdu-Dhabi- based Bank Al-Falah in December, 2002.
One reason for leasing companies being in the fore is heavy recourse by general consumers and institutions to acquire autos, equipment and capital good on leasing. That, in turn, has pushed the demand for autos rapidly. Auto-makers are reporting more than doubling their sales and output, with long lists of orders still to be filled.
A number of TFCs issued so for, were floating rate instruments, but a majority of these also included coupon ceilings and floors to protect issuers and investors, respectively. “However, in the event, the collapse in interest rates have rendered the ceiling redundant-practically all floating rate bonds have hit their floors, providing ample opportunity for investors to book capital gains,” SBP says. Most TFCs were anchored to either the discount rate or the five-year Pakistan Investment Bonds (PIB).
The current financial sector developments are linked to gradual easing of the monetary policy by the SBP, over the past several months. It has continued to slash the benchmark discount rate, at one time, from 14 percent that declined to 9.0 per cent until November 17, 2002. It was further cut to 7.5 per cent effective November 18, 2002.
The cut coincided with, what the SBP says, “a fall in political uncertainty as the Pakistan Muslim League (Quad-Azam), that is thought to favour the continuation of the prevailing 3-year-old economic policies, gained power, ” and it formed its government under Prime Minister Zafarullah Jamali. “The Lower political uncertainty and market expectations of a discount rate cut were both cited as the underlying reasons for the pre-November 2002 weakness in the net private sector credit, but it is difficult to disengage the impact of one factor from the other,” it also says.
Over the last two years, the yield on 10-year PIBs is down from 14 to 4 percent. The six-month Treasury Bills (TBs) are down from a high of 13 percent to 2.2 percent. However the interbank market is reporting, this week, that TBs' and PIBs' yields have started improving. It is attributed to reports that the government of Pakistan is planning to launch longterm bonds with a 10 to 15-year duration. This money will be used to finance big infrastructure projects that have a long gestation period. The government, at the same time, hopes marketing these bonds at the moment will also help absorb the vast unutilised liquidity, currently available with banks.
The present money market scenario is characterized by the fact that, as a result of the SBP policies, the yield curve for government securities continues to move downwards as it also happened towards the first half of fiscal 2003. It also became flatter as longterm yields witnessed a large fall.
The commercial banks are seeing both lending and borrowing rates decline. The large decline in the weighted average lending rate has squeezed the banking spread by 1.32 basis points. Hoover, the state-owned banks experienced their spread narrow down by less than 100 basis points.
Although the proposed longterm government bonds may absorb banks' considerable liquidity, depending on what terms and yields are expected from such investment, there is no escaping the fact that the banks have to produce and market innovative products. They also have to go into still largely uncharted and untrieds fields like consumer banking, farm credit, mortgage finance and the small and medium enterprises (SMEs).
Microfinance is yet another field because these newly established facilities are too little and too expensive with very high lending rates that poor and small entrepreneurs cannot afford. The size and the depth of these unserviced fields is enormous. One banker tentatively estimates the absorption potential of the untapped market at between Rs. 3,800 and 4,900 billion . The projection, for instance includes the potential market of Rs2,000 to 3,000 for consumer financing alone. The SMEs require around Rs1,000 billion . Farm sector Rs300 to 400 billion, and mortgage and housing Rs500 billion.
In a country that is under-banked, under-serviced, neglects vast areas and segments of population uncatered for, and whose “most-modern” industry is still pre-IT age, doesn't it mean: for the bankers, sky is the limit?