Leasing business to grow
Excerpts from an exclusive interview with Etrat
Rizvi, Managing Director, National Development Leasing Corporation
By SHABBIR H.
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.