The privatisation process is beset with mounting difficulties, delaying strategic sale of sinking state-run units. In the absence of any meaningful rehabilitation programme, or none at at all — as in the case of SME Bank Ltd — the plight of the public sector enterprises earmarked for privatisation has become a major national concern.

The SME Bank was set up since commercial banks were, and still are, shy of lending to small enterprises. Small and medium sized businesses were clubbed together to make this specialised banking viable.

The bank, awaiting strategic sale since 2016, has been denied equity capital for making fresh investment to upscale its operations. Policymakers have ignored the problem that a business stagnates if it is not allowed to grow.

In the annual balance sheet 2016, the bank’s board of directors noted that the management was finding it ‘very challenging to operate the bank on a self-sustaining basis’ owing to a ’narrow equity base’ and ‘constraints on business expansion’ imposed by the State Bank.

For more than a decade, the bank has continued to operate with a network of 13 commercial branches and five recovery offices. According to the balance-sheet its net liabilities were equal to its net assets. SME Bank President and CEO Ihsan-ul Haq says the bank’s limited outreach threatens its viability.

In its report, credit rating agency, Pacra, which assigned the bank’s short-term rating of B (single ‘B’), pointed out that the sustainability of the bank’s operations is dependent upon injection of equity capital by the primary sponsor. The government’s stake accounts for 93.89 per cent and the rest is shared by commercial banks.

Policymakers have ignored the problem that a business stagnates if it is not allowed to grow

As far back as October 7, 2009, a meeting of the shareholders had advised the bank management to raise the paid up capital and increase the number of its branches. But the Ministry of Finance has not responded positively to the bank’s repeated requests on the two proposals.

The paid up capital is stuck at Rs.2.39 billion; the minimum capital required by the regulator, if complied with, should have been Rs10bn.

The bank now enjoys an extended exemption granted by the State Bank.

The bank is also exempted from the implementation of Basel II and III till its ‘rehabilitation and privatisation’ due to a large investment required in software, human resource, training, etc.

There has been no notable progress in privatisation either. The first attempt at privatisation was initiated in 2007; in 2008, 18 expressions of interest were received. Short-listed companies/firms were in the process of due diligence when the central bank raised the minimum paid up capital requirement for all banks to Rs23bn net of losses. That seriously affected the feasibility of sales’ transactions. Potential investors lost interest in the proposed deal and the government suspended the transactions.

In order to attract strategic investment, according to press reports, a buyer may be offered a new specialised banking licence at a reduced minimum capital requirement of Rs6bn with staggered payments over five years: Rs2bn in the first year and the rest over the next four years. But the buyer will not be eligible to any dividend until the entire amount is paid.

Any prospective buyer has to think twice before entering into an area of business where major commercial banks move cautiously or fear to tread. Currently the banks’ focus is on financing the corporate sector, foreign trade and investment in government papers. The buyer would probably look at the potential business volume from medium sized enterprises and, like its peers, prefer to largely ignore the small businesses.

The privatisation process for the SME Bank was re-initiated after seven years in 2015 and is still some difficult steps away from any final transaction. Since nearly the last decade or so, the country’s privatisation process has received a setback for a variety of factors: pro-active interventions by the Supreme Court, resistance of PPP and the organised labour, and lukewarm response of the investors. Restructuring efforts have so far have also not yielded any positive result.

In the past, privatisation process was successful because of two major reasons: all sold units were profitable and the size of investment was within easy financial reach of the domestic private sector.

The UK showed that it was easier to sell profitable units; Ms Thatcher rehabilitated state units before selling them. The sale of state-owned banks was managed with the financial and technical assistance provided by the World Bank. It was also easier to disinvest government shares in privatised commercial banks.

Private investment is propelled by business opportunities, offered by the domestic-driven economic growth. Barring the Chinese, both foreign and domestic investors are currently focused on consumer goods industry and businesses. It is difficult to find strategic buyers for sinking organisations with rising viability risks and huge investments involved for a turnaround.

jawaidbokhari2016@gmail.com

Published in Dawn, The Business and Finance Weekly, December 18th, 2017

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