With the stock market virtually shut down and credit flows in the banking system are still painfully slow due to a rising cost of funding - the two financial sector regulators have been unable to finalise a mechanism to provide the respective regulatees under them the help that they desperately need.
The mutual fund industry had sought government guarantee to banks to obtain a Rs 15 billion credit line in order to meet the pressure of redemptions in the Income Funds being managed by them.
Income funds have reportedly placed Rs 43 billion deposits in banks. A bulk of these deposits is with financially weak institutions. The selection of banks was based on a singular criterion - the highest profit paid. No risk parameters were kept in mind. Only SBP''s certification that the banking industry was robust and in good health was taken at face value.
On the other hand, big network and financially strong banks have invested Rs 41 billion with income funds. The return earned on these investments gives a tax advantage to the banks.
After a series of meetings between the representatives of Pakistan Bankers Association and Mutual Fund Industry of Pakistan, a proposal from PBA was floated to freeze the asset and liabilities of Asset Management Companies. In essence, this meant banks would not withdraw their Rs 41 billion invested in AMCs and in return the Rs 43 billion deposited by AMCs in banks would remain frozen.
Some of the financially strong MUFAP members did not agree with the ''freeze formula'' from PBA. They feel that there are two or possibly three very weak AMCs which are on the thin edge and SECP should close them and distribute their assets among unit holders.
On the other side, banks are of the opinion that out of Rs 15 billion in guarantees sought by MUFAP; around Rs 10 billion is needed in AMCs owned by banks themselves. Therefore, no guarantee for funding is needed.
The balance amount of Rs 5 billion is needed by AMCs with no bank within the same group.
While discussions between the two, under the umbrella of SBP, were under way; SECP issued a circular ordering a ''hair cut'' in mark to market of Term Finance Certificates held by income funds. Unlike developed countries that allow income funds to invest in short term commercial paper as well as medium and long term bonds, income funds in Pakistan are allowed to invest in debt issues - meaning TFCs. After applying the SECP ordered ''hair cut'' the Net Asset Value (NAV) of income funds has eroded by four to six percent.
While banks are asking for government guarantee encashable at SBP counter to bail out ASMs - the SECP and MUFAP feel that SBP needs to help out the weak banks because a central bank is considered a lender of last resort and allow AMCs to withdraw their deposits on demand.
According to reliable sources, both regulators have talked to each other on telephone but have thus far not sat on the same table with PBA and MUFAP. The text or the draft of the guarantee offered by the government side is not acceptable to banks. A Rs 20 billion opportunity fund to be operated by NIT is still in the works. While NBP and EOBI can provide Rs 5 billion each - both SLIC and NIT would need to borrow from the banking system to provide Rs 5 billion each.
The Rs 30 billion ''put option'' proposal is reportedly being finalised by the newly appointed Financial Advisor (Faysal Bank). A Rs 25 billion input will be offered to foreign investors and Rs 5 billion to local investors.
Ministry of Finance is mostly pre occupied with getting external flows going and SBP is mainly involved with them. SECP though fully involved with opportunity fund, put option and ASMs are handicapped without the market opening up. The Removal of floor from KSE is largely dependent on the start of IMF credit facility and other multilateral and bilateral inflows.
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