DEFAULT IN LEASING IS DUE TO AMBITIOUS MARKETING
Capping and flooring needed in lending & borrowing to rationalize high spread of banks
Jan 01 - 14, 2007
Exceptional growth in banking sector continued dominating the arena of credit to private sector, besides remarkable development in the financial base is witnessed due to consolidation, merger and acquisitions currently taking place in compliance with the rules laid down by the central bank. The brilliant policy of the State Bank of Pakistan envisages a stronger financial base of the banks by enhancing the size of the paid-up capital.
The leasing sector, on the other hand, has also made its presence felt by supplementing the economic growth by offering an easy and quick access to the financial solutions.
Outlining the performance of the leasing sector, Muhammad Nasim Khan, Chief Executive and Managing Director Sigma Leasing Corporation, said that leasing business was roughly estimated at Rs70 billion-plus in 2006 as compared to around Rs60 billion-plus in 2005, which speaks for itself about the business trend in this sector.
When his attention was drawn towards increasing number of defaults in leasing sector and was asked to explain reasons behind the growing defaults especially in car leasing, Nasim Khan being a seasoned professional dilated upon the theme of default at length by reviewing the economic and changing values of society. He, however, declined to admit that higher rate of financial charges or interest rate was one of the major reasons behind the increasing number of defaults.
Swiss Agency for Development & Cooperation (SDC) will provide Technical Assistance Grant to Leasing Association Pakistan for a period of 4 years (2003-2007)
TECHNICAL/FINANCIAL ASSISTANCE PHASE III
Rs in million
Al Zamin Leasing
Source: Leasing Association Pakistan
Analyzing the situation, Nasim observed that besides leasing companies, almost all the commercial banks were also engaged in leasing business. However, the way of conducting business by banks and the leasing companies is quite different.
Actually, in order to meet certain business targets the banks have hired a large number of people on commission basis. These poor fellows are seen chasing every Dick and Herry to achieve the target without taking care of the financial strength of the customers. Psychologically, most of the people are usually keen to have a car on lease without giving much heed to their earning level. To tell you the truth, one would certainly feel uncomfortable to pay the monthly installments of Rs12000-15000 even for the economy cars if his earnings are below Rs50,000 per month. However, after acquiring a car on lease, the excitement of the owner gradually subsides when harsh realities hit to his light purse.
When asked to comment on higher rate of interest that could be another reason for the default, Nasim observed it was actually because of higher spread of the banks in Pakistan. Though the State Bank has already taken notice of it, yet he suggested that in order to keep things moving both the lenders and the borrowers should be asked to have flooring and capping both on lending and borrowing. That would help eliminate the allegations of extortion or exploitation in the financial sector.
Actually, leasing sector has an ample scope to expand its operations from urban-based business to rural economy. However, it calls for additional administrative cost if the leasing companies decide to expand their business operations in rural areas.
People are usually relating the leasing business with the automobile sector, which has witnessed a turnaround in recent years, while the momentum of vehicles demand continued to persist despite increase in production capacity and imports of cars during the last few years. However, the leasing sector was not confined to auto sector alone. For example, Sigma leasing is providing full payout financial leases against plant and machinery, office equipment and vehicles besides other services and consumer financing and micro leasing.
LOANS DISBURSED BY DFIs AND OTHER FINANCIAL INSTITUTIONS
Name of Institutions
*July-March 2004-05 Source: SBP & SECP.
Sigma has an objective to deviate from usual market segment of large corporate clients and exploration of new markets in the small and medium sectors comprising industrial and commercial enterprises.
Currently, around 19 leasing companies are in operation in Pakistan. However, the outlook for this significant sector seems quite attractive especially on the back of the recent decisions of the Securities and Exchange Commission of Pakistan allowing the leasing to sector to enlarge its area of operations. Under this restructuring in the area of business, the leasing companies would now be eligible to enter in the lucrative business of house financing. The investment in house financing certainly offers much better returns as compared to micro or consumer financing. Hence the leasing sector is bound to play a bigger role in the days to come. However, this would require credit lines to leasing sector at a massive scale to play an effective role in the house financing area.
According to an estimate, the country needs at least 6 million new housing units while the requirement of new houses are growing at 8 percent per annum. In fact, the government was earlier considering to allow Modarbas as well involving house financing sector, yet that decision was still lingering on for the last four to five years. If the leasing firms and Modarbas are allowed in house financing these two can address the housing problem, especially in low cost housing schemes.