LEASING SECTOR: CHALLENGES
The most formidable challenge being faced by the leasing companies at present is the growing presence of banks and DFIs in the lease market
By SHABBIR H. KAZMI
May 19 - 25, 2003
The year 2002 has been an eventful year for the leasing sector. They faced the competition posed by banks enjoying surplus liquidity but lacking attractive financial products. The sector expanded its geographical reach and continued with its commitment to extending more leasing facilities to small and medium enterprises. Leasing companies once again emerged leader in issuing term finance certificates and pioneered the flotation of the first Special Purpose Vehicle (SPV) for raising term financing. The sector also went through mergers and acquisitions. Three mergers were completed in the recent past and more are under execution.
The paid-up capital of members leasing companies increased from Rs 4.3 billion in 1998 to Rs 7.5 billion in 2002, showing an increase of around 74% over the five year period. However, it was mainly due to SECP's regulation to increase the minimum paid-up capital requirement to Rs 200 million. Investment in lease finance went up from Rs 28 billion in 1998 to Rs 39 billion in 2002. However, net profit continued its downward trend and went down from Rs 3.98 billion in year 2001 to Rs 1.92 billion in year 2002.
The key ratios indicate that after a difficult time in 1999, the sector experienced some what stability in net profit margin and return on investment in the year 2000, after showing a declining trend. However, both these ratios again declined in 2001. Net profit margin fell from 9.3% to 4.9% and return on investment decreased from 1.36% to 0.69%. This declining trend continued in the year 2002 as net profit margin decreased to 2.5% and return on investment declined to 0.33%. As against this key ratios of modarabas doing the core business of leasing showed improving trend in 2002 as compared to 2001. The three key ratio i.e. net profit margin, return on investment and return on equity improved. Net profit margin from 7.7% to 12.03%, return on investment from 2.3% to 3.6% and return on equity from 7.2% to 11.1% as compared to previous year.
According to A. B. Shahid, Managing Director, Pak-Gulf Leasing Company two visible trends have been witnessed lately, entry of commercial banks and DFIs in consumer financing business and leasing business and large-ticket lease financing by leasing companies. Another critical aspect that demands a cautious approach is the tendency for writing leases beyond the medium-term. Leasing companies should remain conscious of the risk associated with a significant rate mismatch in a market like ours that has precious little to offer in terms of hedging mechanisms. It may perhaps be overoptimistic to repose excessive faith in a sustained downtrend in interest rates over the next three to five years.
There is a danger that continued lowering of interest rates may soon encourage an unrealistic rise in prices and borrowing. In the absence of risk hedging instruments, there has been a visible increase in number of floating-rate TFCs issued by leasing companies. But, unless leases provide for variable pricing terms, TFCs may carry the disadvantage of inflexible returns on leases written by the companies. Borrowers prefer locking themselves in at firm pricing terms at the outset of the contract. This may limit the cost-efficiency of lease-financing that will be demanded increasingly by lessees, particularly exporters as they struggle to remain competitive in the global markets.
The most formidable challenges being faced by the leasing companies at present is the growing presence of banks and DFIs in the lease market. Their cost of funds, colossal size and extensive branch network seems intimidating at first, but the fact is that leasing by commercial banks in other countries has not been a success. This is essentially because commercial banking and leasing are two different fields based on totally different risk assessment criteria. While leasing inherently entails risk, commercial banking is risk averse. In fact genuine leasing by commercial banks is not really possible and almost invariably leasing by commercial banks results in fully collateralized asset financing in the grab of lease. What is crucial for the leasing companies is to understand this basic difference and try to carve appropriate niche in the market for their lease products.
There is growing cognizance that a level playing field vis-a-vis banks and DFIs be provided to the NBFCs. Leasing business should be regulated by the same regulator and be subject to the same rules and regulations. If the bank desire to undertake leasing business they should set up adequately capitalized separate subsidiaries. In case the banks are unable to set-up separate entities, there should be a reasonable limit on undertaking leasing business. The regulators must announce the rules of the game without further delay.