Growth of leasing sector

Excerpts from an exclusive interview with Muhammad Nasim Khan, CEO, Sigma Leasing Corporation

Dec 10 - 16, 2001

One should not make any attempt to evaluate working of leasing companies without taking into account performance of economy of the country. In case of Pakistan, it is also evident that at times external factors create more havoc than internal crises. Unfortunately, during the year 2000-2001 both external and internal factors were not very conducive for Pakistan and performance was not up to target. Despite, this most of the leasing companies were able to write large number of fresh leases, though provisions were also high. The year 2001-2002 is expected to yield more opportunities. However, leasing companies have to be more prudent in assuming risk to avoid heavy provisioning.

First, I would like to say few words about the performance of economy. Various factors, particularly lower demand for textiles and clothing, led to decline in unit price realization. Many companies delayed the expansion and BMR programmes. On top of this, leasing companies were also reluctant to write fresh leases due to withdrawal of first year depreciation facility. Though, the issue has been resolved now, many opportunities were lost. I will quote Sigma's example. We did not write many leases in the first half of 2000-2001. However, we were able to write over Rs 200 million fresh leases for the year. Bulk of the business was generated in the second half. Since commencement of business, we were able to maintain 100 per cent recovery.

I would say that the financial sector in Pakistan has been going through a comprehensive but complex and painful process of restructuring since 1997. It is aimed at making these institutions financially sound and forging their links firmly with the real sector for promotion of savings, investment and growth. Although a complete turnaround is not expected till the completion of reforms, signs of improvement are visible. The various measures introduced have brought a behavioural change both among the borrowers as well as the lenders. The risk aversion has been more pronounced than warranted. The almost simultaneous nature of various factors makes it difficult to disentangle signs of improvement and deterioration.

Saying this I would reiterate that in year 2001-2002 leasing companies will be able to write more leases. Though, the demand for fresh investment in information technology may not be as vibrant as it was in last couple of years, textile sector would once again have a bigger appetite. Not because that the mills will be very keen, but because they have realized that going for higher value addition is the only way out to maintain their market share in the global market.

The other sector which is expected to have a significantly large demand for funds, is engineering. Though, it is not a very organized sector, some of the companies making components for both passenger and commercial vehicles are adding new and sophisticated facilities to coupe up with increasing demand by automobile assemblers. In fact higher sales of vehicles is driven by vehicle leasing schemes of leasing companies. During the year 2000-2001, a significant percentage of fresh leases written by many leasing companies comprised of vehicle lease.

The factor which will determine the quantum of fresh leases in year 2001-2002 is mark-up rates. The central bank is making concerted efforts to bring down the rates. I do not foresee significant reduction. However, if the central bank is able to maintain the current rates, it would be an achievement. The only reason which make me say this is that with the enhanced demand for funds in the past we have witnessed hike in interest rates and the same may happen once again. The factor which provides some consolation is that so far the GoP has been able to contain its borrowing for budgetary support. However, the probability of large scale borrowing by the government cannot be ruled out completely. The reasons being that revenue collection is falling short of target. With the decline in imports, there has been a fall in revenue collection.

To conclude, I would say that the attitude of regulators has been very positive. Though, the Securities and Exchange Commission of Pakistan (SECP) refused to extend deadline for enhancement of paid-up capital, it cooperated fully with the leasing companies by approving their own plans to increase paid-up capital. It is another thing that at present capital market condition is not very conducive for issue of right shares. Saying this much, I would add that investors have once again started looking at shares of leasing companies.