04 March 2005	Friday	22 Muharram 1426

KARACHI, March 3: All Banks and development finance institutions or DFIs have started capping their exposure in carry over transactions or COT, commonly known as Badla Financing, at February 25, 2005 levels.

Inquiries made by Dawn at brokerage houses revealed that banks and DFIs have been issuing instructions to their brokers asking them to cap their COT exposure in each share at February 25 level, under a State Bank ruling.

Last week, the central bank had asked banks and DFIs to do this "to ensure smooth transition from COT to Margin Financing." The SBP required banks and DFIs to cap their exposure in badla financing not on overall basis, but in each share, at the level of where it was on February 25, 2005. Brokers say banks and DFIs are complying with this instruction.

Pakistan is committed to phasing out COT financing by the week ending on June 3, 2005 and introduce margin financing in its place. "There should be no doubt in the mind of anyone about it," said Managing Director of Karachi Stock Exchange Mr Moin Fudda.

"COT financing is bound to go on June 3," he asserted during a telephone interview with Dawn. He said financing in future contracts as well as margin financing would strengthen the stock market and would benefit the small investor.

Unlike badla financing, which can be availed only by selected clients of banks and DFIs, margin financing would be available even to small investors. And whereas badla financing practically means buying shares out of borrowed money, margin financing would enable an investor to increase his exposure in stocks business remaining well within the limits determined by his financiers.

Currently badla financing is available only in respect of a little over a dozen scrips and that would be phased out before June 3. Gradual exit of scrips from the scope of badla financing has reduced badla volumes over time and there is also a cap on the rate of badla financing to contain volatility.

The KSE MD urged all banks and DFIs to come forward and provide margin financing products to the investors. Analysts say that the capping of badla financing by banks and DFIs is not going to make any significant impact on the stock market. "It has made no impact at all... and it is not going to have any significant impact," says Mohammad Sohail, Director Research, Jahangir Siddiqui Capital Market Ltd.

"Banks and DFIs are big players but they are not the only significant players. There are mutual funds and non-bank finance companies as well (that provide badla finance)," said Sohail.

Whereas SBP has taken the lead by asking banks and DFIs to cap badla financing at February 25, 2004 level, more than three months ahead of the deadline set for its final phase-out, the Securities and Exchange Commission of Pakistan is yet to issue similar instructions to mutual funds and NBFCs.

The exposure of banks and DFIs in badla financing as on February 25 could not be ascertained, but data available on the SBP website show that their exposure at end-January was Rs12.114bn. This volume of badla financing as on Jan 29, 2005 was part of the banks and DFIs overall exposure of Rs43.709bn in the stocks business.