13 June 2004	Sunday	24 Rabi-us-Saani 1425

KARACHI, June 12: The banks' lending policy is not conducive for long-term industrial investment, having deviated from past practices that brought about rapid industrialization, says a business group.

Before the banking sector reforms, quite often sponsors set up capital-intensive long-term industrial projects with a mere 10 per cent equity, with the rest coming as credit/equity financing from DFIs (development finance institutions) and commercial banks, and bridge financing from ICP and NIT. The rest of the required funds were raised from the stock market.

Money secured from foreign machinery suppliers as kickbacks were retained abroad to meet the urgent import needs of spare parts, equipments and raw materials, often delayed otherwise due to stringent import procedures.

When industries were nationalized, most borrowing companies had assets including equipments and inventory much bigger than officially recorded. The process continued till the country's split in 1971 and the nationalization that followed it. Then, there was real flight of capital and the informal investment from siphoned off money, stopped. After the 9/11, the reverse flight of capital has been resumed.

Everywhere, industrialization is initially driven by crony capitalism. Pakistan was no exception. Now, the financial system has been revamped to make industry competitive. In this process, almost all DFIs that provided long-term credit have been closed down.

Large firms are required to raise money from corporate bonds and equity from the capital market. The medium- and small-sized industries depend on reluctant bankers to fund their projects.

In an investment-strategy paper sent to the ministry of industries and production, a business group has suggested that prudential rules and regulations should be revised to make them investment-oriented. The debt-equity ratio should not be prescribed by the central bank as long as the lending bank has assets worth many times over as security in excess of the borrowing. The lender should be left to assure himself of the value of the assets mortgaged and the repayment capacity of the borrower.

To kick-start investment, it has been proposed that previous debt-equity ratio of 80:20 should be restored. A similar ratio has been prescribed for housing building loans. Banks and DFIs should resume under-writing and bridge financing up to 50 per cent of the equity, equal to 20 per cent of the total cost of the projects. The rapid industrialization in the past is explained by sponsors putting up industries by investing 10 per cent of the cost of projects.

Investors complain that no bank is willing to lend money beyond five years at the maximum. The defunct DFIs lent money for 10-12 years. It is impossible to set up an industry on a five-year loan in case of projects of long gestation period, two years or more of which may go into construction, requiring repayment of the principal and interest for any industry within three years. It raises the threat of default and NAB action. Project financing should be extended up to 12 years, including two years construction period.

Industrial investment requires foreign exchange cover which only NBP provides and charges eight per cent with a 10-year foreign loan, says an investor. The financial cost for full 10-year cover at eight per cent comes to 80 per cent of the loan value given to NBP in advance. In this system, foreign currency loans cannot be obtained and industry cannot be developed.

To make matters worse, it is stated that corporate governance reforms have created so much hassles that discourage flotation of new scrips. Good governance regulations should be applicable only to companies having assets in excess of Rs500 million.

There also comes perception that the SECP is going beyond its mandate and is creating problems for companies. Companies are hit by economic cycles when elsewhere, sister concerns, provide the money to help make the losing concern financially robust. This is not allowed.

The concept of "wilful default" needs to be redefined to eliminate victimization. Nowhere in the world there are organizations like NAB to penalise, if business fails. The banking laws are sufficiently powerful for quick and prompt action and, therefore, NAB's preview of corporate affairs should be excluded.