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Corporate self-financing

August 19, 2013
- Illustration by Abro
- Illustration by Abro

As large-scale manufacturing continues to pick up pace, the financing needs of big companies have increased. And banks have started lending to credit-worthy clients in a few selected industrial sectors.

In FY13, when large-scale manufacturing (LSM) grew 4.3 per cent, against just 1.2 per cent in FY12, banks’ net lending to the manufacturing sector shot up to Rs59 billion from only Rs5 billion in FY12. However, overall net lending to private sector businesses (PSBs) totaled only Rs17 billion in the last fiscal year, slightly lower than Rs19 billion a year earlier.

State Bank statistics show that banks lent (on net basis) Rs27 billion to food and beverages companies, and Rs27 billion to various categories of textile industries.

“So, it’s not that the banks are not lending to the private sector. Actually, they are not lending to the sectors where growth is weak, or where industries have strong cash flows to take care of working capital requirements,” says the head of a local private bank.

For example, in FY13, companies involved in the supply of electricity, gas and water made a net retirement of Rs49 billion of bank loans, and banks’ net lending to the construction sector remained static. The reasons are obvious. “As private sector energy companies increased tariff and recovered overdue bills, they went on retiring loans. And as construction activity remained flat, banks’ net lending to this sector remained static,” says the bank chief.

Regardless of the fact that food and textile companies made big borrowings from banks in FY13, quite a number of profitable companies of these and other sectors met their financing requirements through several other means, including intra-group injection of funds and better cash flow management.

“Fantastic growth in stocks, more frequent spells of dollar rise in the open market, and fluctuations in gold and food commodities futures now come in handy for smart CFOs of companies in cash flow management,” says the head of corporate credit of a large local bank.

Small wonder then that companies invest funds in stocks one day, liquidate it next week to reinvest it in Islamic or conventional bonds through banks — and after a while, sell those bonds in the secondary market to generate cash for meeting a specific financial need. Similarly, the cycle of short-term investment sometimes slithers via investment in gold futures to a timely switch-over to food commodities, and finally into dollar buying or selling — both in the interbank and open currency markets.

Corporate financing remained the main victim of banks’ negligence from FY09 to FY12. But even during this period, companies that managed to earn profits kept replacing expensive loans with cheaper ones as and when interest rates declined due to monetary easing.

And they also continued to invest in expansion and capacity-building, as in textiles, energy, food and petroleum refining sectors, to finance working capital requirements of their own or of their sister companies. “The restart of banks’ fresh loaning to profitable sectors in FY13 should have provided the basis for corporate project financing by banks,” says a senior executive of one of the top five banks.

“But here a new challenge has emerged. The environment for project financing is not very conducive from the demand side, as interest rate looks set to rise due to inflationary pressures stemming from this year’s budget, and also because of swift withdrawal of energy subsidies to qualify for a new IMF loan and the recent battering of the rupee,” adds the senior executive.

“On the other hand, companies may also find it difficult to invest in expansion and capacity-building, as their current cost of operations is on the rise due to more expensive energy and high fuel oil prices that push up hauling charges, and also because their financial cost will go up after a predictable halting of the recent spell of monetary easing,” he says.

However, one possibility stands out. As the new government has resolved to keep its bank borrowing in check, banks may now find expanded space for lending to the private sector. Besides, as non-bank financial institutions are now making big money in the stock market, and in a reversal of years-long trend, banks have already stopped making net fresh lending to them, the space for lending to the private sector will expand further.

“This is where banks can provide working capital to private sector businesses, and at the same time, accommodate part of their demand for long-term project financing as well,” suggests a member of the board of assets and liabilities committee of a large local bank.

But for that to happen, banks will initially have to reduce their appetite for short-term government debt papers. The reason is that even if government borrowing is going to remain lower than in the past, when it comes to periodical auctions of debt securities, banks try to park the bulk of their surplus funds in short-term T-bills, knowing that regardless of the end-of-quarter borrowing targets, the government keeps borrowing heavily.

Bankers say this has already started happening, and add that their investment in long-term Sukuk and Pakistan Investment Bonds (PIBs) has increased, even though they still rely heavily on T-bills to park surplus funds.

One particular thing that has recently attracted some additional investment in PIBs is that the new government has used them to make one-time borrowing from banks to settle part of the circular debt.

To strengthen the emerging trend of banks’ corporate financing in selective areas, the government also has a role to play in creating an enabling environment. “Slashing of development expenses or non-utilisation of allocated funds for development denies the private sector of various business opportunities,” says the treasurer of a foreign bank.

In a country like Pakistan, where physical or social infrastructure projects almost always need active participation of private sector contractors, suppliers and auxiliary service providers, the government’s development spending spurs activity in the corporate sector, and encourages banks to start corporate financing on a sizable scale.

In the first five weeks of this fiscal year (up to August 2, 2013), the new government has disbursed only Rs14.5 billion out of public sector development programme (PSDP) funds, which is less than three per cent of the budgeted PSDP portfolio. The official mechanism evolved for the disbursement of PSDP funds requires the government to release at least 20 per cent of the total outlay within the first quarter ending in September.