FAST SHRINKING AUTO LEASING BUSINESS
ALONE REGULATORS COULD BE HELD RESPONSIBLE FOR THE DISMAL SITUATION.
SHABBIR H. KAZMI
Feb 7 - 13, 2011
It was not distant past that there were more than 35 leasing companies operating in the country. The number has reduced to less than a dozen active players but profit machining entities are not more than six. Only the regulators can be held responsible for the prevailing dismal conditions: State Bank of Pakistan (SBP) and Securities & Exchange Commission of Pakistan (SECP).
The blame also goes to the players who chose SECP their regulators, despite attempts by the SBP to take leasing companies under its supervision. As a result, when leasing companies asked for SBP support, disappointing response was received from the central bank.
To understand the situation, it is necessary to recall a few points. The government allowed creation of various types of non-banking financial institutions that included leasing companies, modarabas, and investment banks with specific mandate.
Since the leasing companies were doing roaring business modarabas and commercial banks also jumped into the leasing business. At no stage, modarabas were considered a threat but very soon commercial banks become the monster eating the pie which leasing companies enjoyed for long. Leasing companies requested the central bank to ask the commercial banks to create separate entities for undertaking the leasing business. However, the request was turned down on the grounds that "it is a free market and commercial banks can't be stopped from undertaking leasing business".
Leasing companies told the central bank categorically that they were not asking commercial banks to undertake leasing business but simply demanding creation of separate entities. This could be one of the reasons that when Dr. Shamshad Akhtar wanted to re-regulate leasing companies she had to hear a very loud no. In 2008, when commercial banks suspended credit lines of leasing companies, they (leasing companies) approached governor SBP and her simple reply was 'SECP is your regulator. Please request it to help in resolving your problems'. Therefore, the rift created between the central bank and the leasing companies still exists.
It is necessary to understand the difference between auto leasing and auto finance. The most distinguishing factor is that in leasing ownership of asset remains with the leasing company and the amount being paid by the client is called rental, classified as an expense. At the expiry of the leasing contract, the client has a right to get the title transferred in his/her name after paying the residual value. While in auto finance the title may be in the joint names and the amount being paid by the client is termed installment, which is not treated as an expense.
Effectively most of the banks were not in leasing business but in auto finance business. Since they enjoy better outreach and access to low cost funds, they could easily win the business on the rate of interest charged. On top of this, defaults by the borrowers were large in number but constituted a very small percentage of total lending. Therefore, auto related non-performing loans (NPLs) and provisioning hardly reflected in the balance sheet. However, commercial banks collectively decided to slow down disbursement of auto finance. Now only a few entities are in the auto finance/lease business.
While leasing/auto finance business was booming, nearly 70 per cent of the total vehicles were sold under the deferred payment system. It is true that now car sales have reduced to around half of the peak period, financial institutions are not keen in leasing or auto financing. Strangely, now bulk of the 1,300cc and above cars are sold on cash and still carry huge premium. Only a few financial institutions are actively involved in auto finance out of which Meezan Bank is one of the leaders. This may partly be attributed to the demand by those seeking 'Ijarah', an Islamic mode of financing. It may also be said that Meezan Bank mostly executes corporate deals rather than underwrites lease for individual customers.
In 2008, when commercial banks suffered from worst liquidity crunch, they had suspended credit lines of the leasing companies. The result was leasing companies virtually stopped underwriting leases. On top of this, rising delinquency rate forced higher provisions and companies either posted nominal profit or losses. Though some of the institutions are said to be operative, these have become virtually bankrupt.
One just cannot resist from saying that sales of cars, light commercial vehicles, trucks and buses and even motor cycles cannot be increased without leasing/auto financing.
Though, some of the experts advocate opening up import of secondhand car and other vehicles to make these affordable for the larger percentage of population, others term this a 'ridiculous' policy for a number of reasons that include 1) gross under utilization of installed assembling capacity, 2) huge expenditure on the import of parts and accessories of so many variants and 3) above all attempt to crush the light engineering industry (making car components and accessories). They also say that bulk of the parts come to Pakistan either under the disguise of Afghan Transit Trade or scrap.
A closer look at the pathetic condition of public transport in Karachi demands that financing should be available for taxis, buses trucks and rickshaws. However, preferred mode should be leasing. As such, banks should not be encouraged to offer medium term financing as bulk of their deposits have less than one-year maturity. To overcome cash liquidity, leasing companies should be encouraged to float term finance certificates or issue certificates of investment. This requires changing of regular from SECP to the central bank.
Having said that, SBP should also make it mandatory for commercial banks to incorporate separate entities for undertaking leasing business. In the absence of DFIs, leasing companies emerge the only source of getting medium term funds.