Greenfield investments on hold
While trying to mobilise funds, the private sector finds itself stuck between a rock and a hard place.
The incentives of floating Initial Public Offerings in the capital market have been lost due to an unjustified equality in rate of taxation at 35 per cent for both the listed and unlisted companies. The listed firms also have to remain uncomfortably under the gaze of regulators and comply with the cumbersome code of corporate governance.
Fewer than five new companies entered the stock market last year; most of the 60,000 registered entities opting to remain under the fold of ‘sole proprietorship’ or ‘partnership’. Starved of funds, it should scarcely be surprising that companies do not invest in new industrial ventures. Many a balancing, modernisation and replacement projects have also been put on the hold.
Much is being said and written about disenchantment of banks to lend to the private sector. Government borrowings are blamed for crowding out of the private sector. But it does make sense for banks to offer cash to the government in risk-free Treasury Bills (T-Bills) and Pakistan Investment Bonds (PIBs) at say 14 per cent. The strongest of the corporate groups are asked for Karachi Inter-bank offered Rates (Kibor) plus four, equal to 17 per cent for advances from banks and the rate soars for weaker entities.
Mr Shaukat Tarin, an eminent banker and currently advisor to the Silk Bank, conceded that banks were enjoying splendid spreads, but they could not be forced to divert money from government papers to the private sector credit.
He, however, said it was possible to apply ‘moral suasion’. Bigger banks with ample liquidity could be directed by regulators to feed the under-developed and productive sectors. He identified them as the Small and Medium Enterprises (SMEs) which currently receive a paltry 13 per cent of the credit. “Housing sector also demands attention for priority in credit, since it creates jobs by supporting 42 downstream industries,” says Mr Tarin.
According to head of research at brokerage Invest Cap Khurram Schehzad, the government borrowings from the SBP had been capped at Rs1.2 trillion in an agreement with the International Monetary Fund. Yet it always tends to overflow, as on Feb 10 this year the limit was crossed by Rs194 billion.
Another Rs700 billion were borrowed from scheduled banks. Many economists, therefore, criticise the failure of SBP in keeping a tight lid on government borrowings. “It looks simple to do that in theory,” Salim Raza, former governor of SBP, told Dawn and added, “but it is not that easy in practice.” The central bank, he said, for instance, could not bounce back urgent cheques of essential services such as PIA, Wapda, Railways and others of national importance.
He also stressed that scheduled banks could not be ‘forced’ to lend to the private sector and lower spreads. If that was legislated, the banks could still find a way around the law. “They may offer credit at the mandatory rate of say 10 per cent, but will compensate in other ways, by charging higher rates in Letter of Credit or ‘other services’, said the former SBP governor. All of which, he insisted, pointed to discovering an intelligent solution to the issues.
He said strong investment banks, market-makers and fund managers could act as intermediaries in breaking the stranglehold of banks in setting the spreads. Mr Raza also pointed to a contraction in already shallow secondary debt market, evidenced in falling investment-to-GDP ratio. That, he asserted, had restricted access to the credit, leading to high interest rate spreads in the banking sector. The country’s investment-to-GDP ratio had slipped from 28 per cent in 2003 to 22 per cent, currently, he said.
Industry insiders say if the banking sector was enjoying wider spreads, mainly through corporate financing for short-term at exorbitant rates and paying pittance to depositors, much of the benefit, as elsewhere in high-income countries, line the pockets of banks’ bosses. Their salaries, bonuses and perks were envy of top men in other industries. A cursory glance at a recent annual report of a listed bank showed a note to accounts stating: “paid to past president for past services.” The amount was a mind-boggling Rs142 million!
But must corporates depend on banks for credit? A capital market expert said that except for a few large conglomerates — Mansha, Sapphire, Ibrahim, Yunus Brothers and some strong multinationals — none had enormous amount of retained earnings to finance new projects or even for BMR. Small and mid-sized companies and those with dream plants costing billions had to knock at the doors of banks.
“Forget the sixties when a ‘Seth’ would build an empire with much of his own money.” Having only part stake in corporates, directors now resort to siphoning off funds by transferring money to ‘associated undertakings’ wholly-owned by them and to write the principal and interest off as ‘bad’, in the years following. The SECP took notice last week of some such listed companies that attempted to rip off shareholders.