An outcome of persistent recessionary trend in the country

Jan  25 - 31, 1999

The leasing companies, operating in Pakistan, have witnessed divergent trends in 1997-98. Some of the companies, considered to be the role model, were forced to make heavy provision against doubtful rentals. A few companies, taking the fullest advantage of their niche market, succeeded in expanding their lease business. But, a few facts remain undeniable. These are: shrinking size of business volume, increasing cost of fund and reducing repayment ability of the leases. This, on the one hand, has resulted into heavy provisioning against doubtful rentals and, on the other hand, caused cash flow problem for the companies.

The aftermath of nuclear tests adversely affected the operations during the first half of the current financial year. There is a forecast for optimistic outlook for the sector for the second half of the year. However, the business volume and profit margin will largely depend on the ability of the economic managers of the country to put the economy on the faster track of development

The review of annual accounts of leasing companies clearly indicates that subdued performance of the sector was mainly due to the continued recessionary trend in the country. Even the various incentive packages failed to deliver the desired turnaround. The performance of leasing sector is the reflection of the trend of industrialisation in the country and it may be said that the GoP failed to provide the required impetus. But the disappointing fact is that various factors, both internal and external, said to be responsible for the continued recession in the country, are not the real reasons but attempts to rationalise the poor performance.

Almost all the companies, in their annual reports for the year 1997-98, had expressed apprehensions for the post nuclear test period. However, the unaudited accounts of some of the companies, for the period ending December 31, 1998, are expected to post increase in volume as compared to the volume achieved during the corresponding period of last year.

Therefore, it is necessary to explore the underlying factors for this phenomena. According to Humayun Murad, chief executive of Orix Leasing Company, Pakistan, the leasing sector is the only source for short and medium funds requirement. In the absence of proactive DFIs and other financial institutions the leasing companies are the last resort for meeting the minimum needs of the industry and services sector for the up gradation of facilities and BMR. This view was also subscribed by the CEOs of other leasing companies. However, only those companies will be able to avail the inherent advantage which have strong cash flow to meet the enhanced need for funding.

Mohammad Nasim Khan of Sigma Leasing, citing the example of his own company said, "We managed to expand our business by concentrating on the much neglected segment of the textile sector made-ups manufacturing and export. Most of our clients are small to medium sized but are prompt and on-dot on rental payments".


At present, 33 leasing companies, nearly a dozen modarbas and other financial institutions, are involved in the leasing business in Pakistan. The leasing sector has a brief but eventful history. The first leasing company, National Development Leasing Corporation (NDLC) started operations in 1985. Since then the sector has witnessed persistent high growth rate.

The total disbursement in lease financing by 41 companies, members of Leasing Association of Pakistan, upto June 30, 1997 was around Rs. 40 billion showing an aggregate growth rate of 30 to 35 per cent per annum during last five years. The share of leasing is estimated around 8 per cent of the total private fixed capital expenditure in the country. This indicates substantial growth potential when compared with other countries where its share in private fixed capital expenditure is reported to be around 40 per cent.

As on June 30, 1997 the paid-up capital of these 41 companies, (33 leasing companies and 8 modarbas doing leasing as core business), exceeded Rs. 6.3 billion with revenues of more than Rs. 3.8 billion. As against this, the total assets of these companies were more than Rs. 37 billion. The liabilities including certificates of investment (CoIs) were around Rs. 27 billion. The liabilities also included long term borrowing from multilateral institutions like Asian Development Bank, International Finance Corporation (IFC), Commonwealth Development Corporation (CDC) etc.


In spite of poor performance of the economy in 1996-97, member companies earned an aggregate after tax profit of over Rs. 1.2 billion out of which Rs. 665 million was distributed among the shareholders. The members paid Rs. 190 million as corporate tax in addition to collecting sizable amount of withholding tax on behalf of the tax collection agencies. The lease facilities provided by the sector helped in improving productivity of the leases, which, in turn, increased overall capacity and quality of manufacturing and services sectors, provided exportable surplus and generated employment besides enhancing revenue collection for the government.


During 1997-98 the sector witnessed a mixed performance. Companies like National Leasing, PILCORP, Orix and some others, drawing the largest chunk of annual lease business, witnessed reduction in volume of business, increase in finance cost reducing the spread and enhancing the need to make heavy provisions against defaults in rental payments.

According to some sector analysts, the probability of increase in number of requests for rescheduling can pose serious cash flow problems. The declining ability of the leasing sector to mobilise funds through low cost deposits, mostly determined by outside factors, has forced them to indulge in short-term expensive borrowing.


According to some sector experts, a large number of leasing companies, at present, are working on a spread of less than 5 per cent. This slim spread is not sufficient to keep their operations profitable for a long time. The financial cost has become mind boggling.

Ghandhara Leasing Company earned lease revenue of about Rs. 86 million in 1997-98. As against this, their financial charges were about Rs. 73 million. The administrative expenses amounted to about Rs. 26 million. The Company posted a pre-tax loss of Rs. 21.86 million.

Similarly, Leasepak Limited posted income from leasing amounting to about Rs. 87 million and paid Rs. 70 million as return on borrowing and financial charges. The Company earned a pretax profit of Rs. 5.7 million. However, taking the advantage of inappropriate profit, brought forward from last year, paid 10 per cent cash dividend amounting to Rs. 12 million.


The provisioning against doubtful rentals achieved an alarming dimension in 1997-98. Even the role models of the sector were forced to make heavy provisions. Pakistan Industrial Leasing Corporation (PILCORP) earned a profit before provisions of Rs. 146.5 million. Out of this about Rs. 98 million was transferred to provisions for doubtful receivables. The Company made only Rs. 38 million under this head in the previous year. Similarly, National Leasing posted a profit before provisioning of Rs. 196 million and made provisions of Rs. 110.75 million against doubtful rentals.

This was the strength of the financial condition of these companies that they succeeded in making such heavy provisions but clearly indicate the deteriorating repayment ability of leases. The situation raises two points: was this default circumstantial or the result of an ambitious effort to acquire more business — overlooking the stringent credit risk appraisal followed in the past.

Some analysts are of the view that shrinking business has forced leasing companies to extend business to financially weak companies. Had the economic conditions not deteriorated such companies would have not faced cash flow problem affecting their rental payments.

Paid-up capital

The leasing companies are required to raise their paid-up capital to a minimum of Rs. 200 million by November 27, 1999. Corporate Law Authority (CLA) had agreed that it might extend the deadline for another one year on the basis of sound reasons. However, it looks almost impossible that a large number of companies would succeed in enhancing the capital by the deadline. At present a number of companies have very small capital base and they would not be in a position even to convince the CLA to grant them extension.

Natover Motor Lease is one such company. As on June 30, 1998 the paid-up capital of the Company was Rs. 52.5 million. But due to accumulated losses of over Rs. 20.6 million the shareholders equity had reduced to about Rs. 44.6 million (including reserves). This also reduced the balance sheet footing of the Company from slightly more Rs. 146 million in 1997 to Rs. 122.77 million in 1998.

Another such company is Asian Leasing Corporation. As on June 30, 1998 it had a paid up capital of Rs. 104.5 million and accumulated losses of about Rs. 61 million. During 1998 the Company had incurred an after tax loss of Rs. 50 million alone. This has also reduced the balance sheet footing of the Company from Rs. 432.4 million in 1997 to Rs. 329.8 million in 1998.


Certainly there is nothing wrong with the sector. Most of its problems are aftermath of poor performance of the economy. It has been said that some of the companies were forced to make heavy provisioning. But the strength of these companies is that they have consolidated their future profits.

There have been frequent requests for rescheduling of rental payments, but most of the leases have legitimate reasons for asking for a favour. Every financial institution has to take into account the economic scenario of the country and develop and implement prudent policies to overcome the situation. While some of the companies improved the level of risk rating many of them were contended with smaller volume to avoid potential threat of heavy provisioning.

The problems of availability and higher cost of funds, mismatch of demand and supply is being addressed by floatation of TFCs. But, only GoP is responsible for the higher rates of interest in the country. The GoP is not only the largest borrower, to meet its budget deficit, but also offers the highest yields on its securities. Internationally the yields on government securities are low due to the higher level of security. The GoP, by sucking in, most of the funds, particularly from the large size nationalized commercial banks, hardly leaving any percentage for the consumption of private sector.

One can expect some mergers and acquisition in the leasing sector in the near future. It is desired to reduce unnecessary competition — a source of reducing profitability. Besides, such mergers can also help in improving the synergy in post merger scenario.