The growth of the NBFCs is dependent on their ability to generate resources relevant to their nature of business


May 17 - 23, 2004





There is a growing perception that in the absence of DFIs in the country's companies undertaking leasing as core business have become the only source for medium-term funds. However, the entry of commercial banks in leasing business has resulted in severe competition, which is being exploited by some of the clients. To find out the details and possible remedies, PAGE talked to Basheer A. Chowdry, Chairman, Leasing Association of Pakistan. Following are the excerpts from the interview.

Leasing companies and a number of Modarabas have been doing the core business of leasing for nearly two decades. However, lately some of the commercial banks have entered the business purely to utilize their excess liquidity. It has been observed that the banks are offering the rates and other terms and conditions that are affecting the overall health and stability of the leasing sector. While no one has any objection on fair competition, there is an urgent need to bring the leasing business of the commercial banks under the regulatory framework of NBFC's Rules by establishing proper subsidiaries for this purpose.

Securities and Exchange Commission of Pakistan (SECP) has developed prudential guidelines for various activities falling under the NBFC umbrella. While some of the prudential measures would be common for all the activities, it is encouraging that separate guidelines are being developed for every activity to be conducted by the NBFCs, keeping in view the particular risks and opportunities of the various types of business. It is also useful that the respective Associations are being consulted for the preparation of the prudential guidelines aimed at creating an effective regulatory framework based on market realities.

It is no more possible for any entity with only one service or products to survive and grow. The NBFC regulations are aimed at providing ample opportunities to all the players to handle more than one product and/or service in order to achieve diversity of operations. We fully endorse the need for capital adequacy and the infrastructure to handle any particular line of business. However, it may be pointed out that the current formula of capital adequacy, requiring allocation of specific blocs of capital for various types of businesses, favours only the large organizations and hampers smooth operations of smaller organizations, which actually need to diversify in order to enlarge their business base.

It may be argued that the consolidations and mergers of the organizations is a solution to overcome the prevailing situation but it is also a harsh reality that most of the times it is difficult to find suitable partners for the intended mergers. Therefore, it may be appropriate that the formula of the capital adequacy may be reviewed in order to compensate for the common functions among various types of businesses and accordingly some concessions may be granted in calculating the additional capital requirement. For example, investment finance services and investment advisory services have some commonality of operations and may be treated accordingly.



Growth of NBFCs is directly dependent on their ability to mobilize resources at appropriate rates and maturities relevant to their nature of business. This becomes more crucial for companies undertaking leasing and housing finance business, requiring funds of medium to long-term nature. While some of the NBFCs have issued Term Finance Certificates (TFCs) and other debt instruments, it is necessary that NBFCs be provided access to a pool of funding (possibly managed by State Bank of Pakistan (SBP) and the SECP with appropriate cost and maturity structure. Funds provided by multilateral agencies aimed, at the deepening of the financial sector of the country, should be diverted to such channels in order to enhance the business handling capability of the NBFCs.

Recently, leasing companies have been made eligible for the LLM Scheme under which soft-term refinancing is provided by the SBP. Similarly, Export Finance Scheme should also be made available to leasing companies to enhance their participation. Funds being allocated by the donor agencies for the poverty alleviation could also be utilized through the leasing sector for the micro and small leasing operations in order to promote income generation at the lower strata of society.

It is also necessary that adequate training facilities are made available at all levels of the staff of the NBFCs to create a professionally strong infrastructure for handling various types of products. It may be worthwhile to consider setting up an NBFC Institute, on the pattern of the Institute of Bankers where suitable courses and seminars are conducted for the benefit of the NBFC executives and staff. Until such an institute becomes functional, arrangements are being made with the Institute of Bankers to run specific courses for the NBFCs. Various associations can lend effective support by providing experienced instructors with practical knowledge to undertake such courses.

The NBFCs have also embarked upon an active research and product development programme to diversify their basket of services. Experience of other emerging economies can be very useful and the Leasing Association has been holding seminars, workshops and overseas visits of its members for this purpose. Also, the outreach of the leasing companies to the smaller towns has started to happen over the last two years. This would have a beneficial effect particularly for their marketing MSE and agricultural sectors.