KARACHI, April 7: Non-bank financial companies (NBFCs) including investment banks, leasing companies and modarabas may now find it easier to raise funds from the inter-bank market — thanks to a new ruling by the State Bank. The central bank has removed the cap of half a million rupees for commercial banks and development finance institutions (DFIs) willing make clean or unsecured lending to NBFIs. It has removed the cap also for investment in certificates of investment (COIs).
The central bank conveyed its new ruling through a circular issued by its Banking Policy Department on Thursday. The circular (BPD no 14) has added a new category to the list of cases exempted from the condition that banks and DFIs cannot lend clean or unsecured more than half a million rupees to a single party.
Investment in COIs and inter-bank fund placements with NBFCs have been added to the list of the exemptions that earlier included (i) facilities to finance export of eligible commodities (ii) financing under the guarantee of Pakistan Export Finance Guarantee Agency and (iii) loans/advances given to the employees of banks and DFIs.
Bankers and analysts say that with the exemption of per party limit accorded in case of investment in COIs and inter-bank placement of funds with NBFCs, banks will get a chance to increase their lending. “This would be an attractive small avenue for banks and DFIs to place surplus funds because COIs offer relatively high returns,” said Mohammed Sohail, director of research at Jahangir Siddiqui Capital Markets Ltd.
Treasurer of a large local bank said this would primarily benefit NBFCs that are unable to raise large funds from the public because of their small branch networks and also due to lack of interest among general investors to place funds with them.
Non-bank financial companies that are governed by the Securities & Exchange Commission of Pakistan issue certificates of investment to raise funds for different tenures —- they offer a rate of return higher than that offered by banks and DFIs. But as NBFIs are much less exposed than the banks and DFIs are to the investors’ community and they also enjoy a lesser level of trust, fund raising becomes a bit too difficult for them — particularly when the interest rates are moving up. They do borrow extensively from banks and DFIs but occasionally turn to the general public for fund raising through COIs that include both listed and non-listed term finance certificates.
With banks and DFIs now free to increase their clean lending to NBFIs, the latter will be in a position to raise funds as and when required for short terms. “NBFIs had approached SECP for winning this concession and SECP being sympathetic to our demand had taken up this matter with the SBP,” said Basheer A. Chowdry, ex-chairman, Leasing Association of Pakistan.
He said though this would not immediately make fund-raising much easier for NBFCs “but it is a step towards opening up as many avenues of fund-raising as are possible.”
The fact that NBFCs have got a concession for increasing their borrowing from banks and DFIs at a time when interest rates are moving up, makes it all the more important. As the State Bank started tightening interest rates since the start of new fiscal year in July, weighted average lending rate of all the banks combined shot up from 6.49 per cent at end-June 2004 to 7.08 per cent at end-February 2005. Further increase in the average lending rate is quite certain as the central bank kept on tightening interest rates even after February — and continues to do so.
As the interest rates moves up, those leasing companies find themselves in a mark-up mismatch that had written leases at relatively low rates in the past and had not opted for floating interest rates. With the ability to make increased short term borrowing in the inter-bank market without any collateral, leasing companies can now use the funds so borrowed to avoid such mark-up mismatch in future.
