LEASING companies are facing a huge challenge from the growing parallel leasing business. Thousands of sale points, spread all over the country, continue to sell motorcycles, TV sets, computers, laptops, refrigerators, deep freezers and washing machines etc. on installments.

This has squeezed the room for leasing companies to provide such items. “A majority of such competitors are operating in the informal sector and can afford to compromise on documentation, which creates a false sense of being customer-friendly,” says a senior executive of a mid-sized leasing company.

“This competition is no less in intensity than our competition with commercial banks, whose expanding leasing business has left little for us to do.”

Leasing company executives complain that even when banks lend to them, they charge interest rates that are higher than those applicable on good corporate borrowers

To make things worse, cash-rich growers, traders and groups of wealthy individuals have also ventured into parallel leasing of agricultural tools and implements, as well as small industrial machinery and plants, say market sources.

And since leasing companies are, by and large, short of resources, industrial leasing is mostly in the hands of banks. A few exceptions do exist, but even in these cases, the company providing large industrial leases happens to be either a bank-sponsored entity or gets its funds from banks.

In addition to this, many companies and business houses encourage their employees to get motorcycles, cars, computers and laptops etc. on lease from agents of the makers or importers of these items.

That is why even after showing a modest turnaround in FY13, leasing companies are not on the path of sustained growth.

Only four leasing companies — three of them run by banks — made over Rs1bn investment in lease financing in FY13 and only three of them (two run by banks) earned more than Rs100m in annual profit.

The situation is precarious, if not disastrous, say leasing company executives. Total lease financing by all 10 companies, including three run by banks, stood around Rs24.5bn in FY13. This compares with banks’ lending of Rs18bn for consumer durables only in the year (excluding autos), showing why leasing companies feel so much threatened by banks’ penetration into the business.

“And when we see that only one leasing company, i.e. ORIX, had 62pc share in total lease financing, it’s not difficult to deduce that other companies are barely surviving,” says an official of the NBFI and Modaraba Association.

“Unless leasing companies are permitted to raise funds from the interbank market or unless individual banks make larger and cheaper loans to them, most of them will continue to struggle for survival,” he opines.

Banks’ investment in, and lending to non-banking financial institutions has been declining not because they are deliberately ignoring the fund requirements of leasing companies, bankers say. A surge in credit demand from private sector businesses in FY13 had crowded out NBFIs as a whole, and the situation is projected to remain almost unchanged during this fiscal year as well.

Leasing company executives also complain that even when banks lend to them, they charge interest rates that are higher than those applicable on good corporate borrowers.

Funds obtained at such high rates — generally in the range of 2.5-3pc over three- or six-month Kibor — make it difficult for the companies to utilise them for investing in fresh leases. The companies that are sponsored by banks, however, have access to lower-cost funds from their sponsors. That is why they outperform all others, excluding one, in profit- making.

The tax exemption applicable on Modarabas, which distribute 90pc of their profits to certificate holders, also makes it difficult for leasing companies to raise funds through certificates of investment because no such exemption is applicable on them.

Despite constraints to fund-raising and amid tough competition from Modarabas and parallel lease providers, leasing companies can still grow if they grab opportunities as they unfold, instead of lamenting on what’s not coming their way.

For example, “they can spend more on hiring young executives and task them with reaching out to new urban and rural customers, including those who fall prey to parallel lease providers,” suggests a senior bank executive.

By the end of FY13, the total number of employees of all 10 leasing companies was 654. They were providing leasing services to clients through their 49 branches. With such a small branch network and limited number of employees, the companies can hardly win new businesses in agriculture, SMEs and consumer leasing.

Bankers also point out that with the Shariah-bias growing fast in auto and agricultural leasing, leasing companies need to establish Shariah-compliant divisions to penetrate deeper into the market. Orix Leasing has done this and reaped big benefits.

Executives of leasing companies argue that the per-party exposure limits imposed by the Securities and Exchange Commission of Pakistan hinder their plans to improve profitability through continued servicing of old clients. But SECP officials say the very purpose of these limits is to ensure prudent risk management and encourage leasing companies to expand their clientele.

Published in Dawn, Economic & Business, November 3rd, 2014