Leasing business to grow further

Excerpts from an exclusive interview with Etrat Rizvi, Managing Director, National Development Leasing Corporation

Dec 10 - 16, 2001

Leasing business has been playing a catalytic role in capital formation ever since the first leasing company, National Development Leasing Corporation (NDLC), was established in Pakistan. Attractive returns have encouraged not only many groups to establish leasing companies but other financial institutions to undertake this business. Establishment of large number of leasing companies has led to excessive competition and shrinking spread. The clients have emerged to be the largest beneficiary of this competition. This is evident from reduction in mark up rates over the years.

In the past only large corporations, enjoying healthy cashflow, exercised this option to attain tax advantage. However, now even smaller companies and small and medium enterprises (SMEs) are resorting to this option for capital formation. In the past there was a preference for financial lease but more and more clients are now opting for operating lease. At the same time, micro-lease has become a preferred selection of those who receive regular income. Still, there is a huge latent demand. To meet the increased demand for leasing, the leasing companies have issued TFCs in addition to borrowing funds from banks and other financial institutions.

The year 2000-2001 was a difficult period mainly because of external factors. However, some sponsors took the full advantage of sluggish business environment by focusing on expansion and BMR. Most of these plans are aimed at achieving higher value and are being undertaken by those companies which fall under the category of blue chips. However, others have also taken a lead from them and are busy in executing their own plans. Therefore, the appetite for funds is expected to remain high in coming months.

Dividend payout for the year 2000-2001 is expected to remain low for those companies which have not been able to meet minimum paid-up capital requirement. While some companies are expected to issue bonus shares, right issues will be common, though at a discounted price. As regards issue of right shares, sponsors of those companies which have faith in Pakistan's economy as well as their own companies will be able to issue right shares earlier than those companies, which have slightly weaker track record.

I would add that the issue of first year depreciation kept all the leasing companies under pressure for nearly 15 months. Though, the issue should have not arisen at all. However, the efforts by Leasing Association of Pakistan (LAP) and Securities and Exchange Commission of Pakistan (SECP) resolved the issue.

State Bank of Pakistan (SBP) is making concerted efforts to bring down interest rates in the country. The central bank has been successful to some extent but higher intermediation cost remains a key issue. In my opinion, this issue can be resolved if commercial banks decide to lend money to leasing companies, rather than undertaking leasing business. Commercial banks should complement the role of leasing companies. This will help them focus on their main domain as well as improve profit margin.

I see a gradual shift in borrowing habits. Now more and more companies as well as individuals prefer to choose lease option. Hire purchase arrangements are also becoming common. If one looks at the portfolio of large leasing companies, the percentage of vehicle business has grown significantly. It is difficult to say whether the trend will continue or once the demand for funds for plant and machinery increases, leasing companies would still choose to build upon this portfolio. I understand that since demand for funds by industry was low, leasing companies diverted their funds to automobile lease. There is another way to explain this trend. There was a huge latent demand which leasing companies were able to exploit. However, with the passage of time the demand is bound to decline and share of automobile lease in total lease business will not remain so high.

Performance of leasing companies is a reflection of performance of economy of Pakistan. There are ample evidences that economic turnaround is a reality. It is another thing that we will see the results with the passage of time. Textile sector, having the largest infrastructure, will once again lead the demand for funds.