CORPORATE BANKING A WAY TO GIVE PREFERENTIAL TREATMENTS TO LARGE BUSINESS ENTITIES
SHAMSUL GHANI (firstname.lastname@example.org)
Jan 25 - 31, 2010
Banking in Pakistan has gone through various phases that include the early times' highly personalized services to the entire client spectrum and the present day preferential treatment to the selective high profile business groups that are offered a wide range of services under one-window operations known as corporate banking. The size of entities qualifying for such treatment may be different for different banks; one of the largest and oldest banks in Pakistan eyes a 300 million turnover mark for inclusion in the high profile league of customers.
Pakistan's financial sector is predominantly bank-led with total bank assets to GDP ratio of more than 50 per cent and a total market capitalization weight of more than 30 percent. Good corporate governance for banks means a solvent and stable financial system. The corporate governance of banks is closely linked with the corporate governance of client firms. Corporate banking provides a buffer to the two distinctly different styles of governance where corporate and banking sectors meet to make financial decisions that cumulatively promote the health and well-being of the two sectors. Well managed profitable corporate firms get a higher ranking on the banks' loan and investment portfolios.
Corporate banking provides a variety of services to the client corporate firms, ranging from maintenance of corporate current accounts to the highly sophisticated operations related to corporate finance. Askari Bank's corporate banking division offers services that include working capital finance, term loans, structured trade finance facilities, L/Gs, L/Cs, funds transfer, export finance, bills and receivables discounting. Habib Bank Limited, unquestionably the pioneer of Pakistan's banking industry, introduces its corporate banking group in the following words:
"HBL Corporate Banking Group comprises a seasoned team of Relationship Managers (RMs) to meet the demanding service standards of large corporations. A long history of financing and nurturing relationships in Pakistan has given HBL a unique insight, enabling us to provide timely and effective financial solutions for our customers to meet the growing challenges of a global economy."
Services offered by HBL to its corporate clients include working capital finance (overdrafts, foreign exchange loans etc), pre and post shipment export financing (PKR and US$ based), import financing (PKR and US$ based), locally manufactured machinery funding, receivables discounting, Islamic banking facilities, cash management services, trade services including L/Gs, L/Cs etc. Almost every single bank operating in Pakistan has its corporate banking division which has now become a pre-requisite to attract large corporate entities. The most sensitive area of corporate banking is corporate finance. Modern day business relies on leveraged operations to survive in the competitive markets on one hand and to maximize stock holders wealth on the other. Prudent borrowing and lending decisions are made by the top brass of corporate firms and banks, with each set of high profile executives - who are trained professionals - vying for an advantageous position for its organization without attempting to outsmart those on the other side of the table. It is almost a win-win scenario.
The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. This definition essentially applies to the corporate firms. The banks see corporate finance as an investment decision that promises profit maximization keeping the financial risks to a manageable limit. Jointly, it's a structured arrangement to utilize bank's money by the corporate business in such a manner that safeguards the interests of both organizations. For banks, the most important area is the collateralization of finance and borrower's repayment capacity while corporate firms bid for an arrangement that ensures minimum cost to the business and generates sufficient revenue inflows to cover loan repayments. Banks use the time-tested yardstick to evaluate their prospective borrowers-capacity, character, and collateral-3Cs.
Corporate finance may be short, medium or long term. Short term finance commonly known as working capital finance for day to day business requirements is normally repayable after one year. Working capital finance is usually collateralized through hypothecation or pledge of business inventories. Under hypothecation, a bank lien is created on stocks of raw material, semi-finished and finished goods, while the actual possession of inventories remains with the corporate firm. Under pledge, the actual possession of inventories is passed on to the bank that controls the inflow and outflow of raw material and finished goods. The arrangement under hypothecation is referred to as running finance, while the arrangement under pledge is known as cash finance.
A medium or long term loan for fixed assets financing takes the name of demand finance. Business receivables can also be used to avail corporate finance either through assignment or discounting.
Project financing is the most fascinating area of corporate banking. This may be applicable either to a new project or to the expansion of an existing project. Project financing was basically the domain of development financial institutions. NDFC, PICIC, ICP. Banker's Equity etc. were the institutions that practically monopolized project financing till early eighties. When the then NCBs were raised to the status of development bankers entitled to use up World Bank and Asian Development Bank foreign currency credit lines, the corporate banking assumed new dimensions. The banks, unlike development bankers, expedited the project evaluation job in comparatively less time. Their project evaluation reports that were essentially scrutinized by the international loan giving agencies drew a word of appreciation from those agencies. The traditional DFIs also responded to the situation and scaled their performance a few notches up. Almost all the foreign currency credit lines were used up. The middle and late eighties and early nineties saw the launching of a number of industrial projects.