Yaseen Anwar, Governor, State Bank of Pakistan (SBP) has disclosed that a joint task force of SBP and Securities & Exchange Commission of Pakistan (SECP) has been set up to draft a frame work for establishing a vibrant corporate debt market.
Delivering his key-note address at a conference on 'Long Term Debt Financing - Issues and Challenges for Pakistan' organised by the Institute of Business Management (IoBM) in Karachi on Monday, he outlined the tasks of the joint task force, which included to develop guidelines for shelf registration of corporate debt, collaboration with credit rating agencies to streamline the issuer and instrument rating process and co-ordination with provincial authorities on rationalisation of stamp duty on transfer and issuance of corporate debt instruments.
In addition, this task force would also collaborate with the FBR and the GoP to rationalise tax treatment of corporate debt instruments to encourage the development of corporate debt market, he said. It was essential that taxation issues were addressed in an appropriate manner and communicated to the stakeholders, he stressed.
A document containing all conventions and standards was needed to streamline the approval process of shelf registration with an objective to facilitate the issuer, he added. Anwar said that these initiatives were of utmost importance to be above to move from a purely banking loans market towards a vibrant Debt Capital Markets.
"This will not only facilitate to provide diversified investment avenues for various stakeholders, but also help improve saving ratios of the country and enable borrowers to raise efficiently price financing for crucial infrastructure projects," he said and added that in this regard, Investment Banks as well as Development Finance Institutions should also play a significant role in the development of a vibrant Corporate Debt Market.
The SBP Governor explained that corporate debt markets were important for several reasons - as a source of long term financing; providing competition to the banking sector; and enhancing financial stability. "I believe that we need to develop an alternative avenue of intermediation: corporate debt market. These markets will allow the channelling of funds directly from savers to the private sector - matching the demand for funds for long term investments with the supply of long term savings," he added.
He said that the existence of a functioning private bond market served both borrowers by broadening access to funding and by lowering borrowing costs and savers. "In Pakistan's case in particular, it would provide savers with an alternative to bank deposits. It has long been recognised that the presence of such markets is a significant source of competition for the banking system," he added.
"It is a matter of concern, and indicative of potential, that the size of the listed corporate debt market in Pakistan stands at less than one percent of GDP," he said, adding that corporate debt market could enhance financial stability by mitigating rollover interest risk for borrowers. He said that corporate debt market could improve the allocation of capital as market-determined rates provided a clearer measure of the opportunity cost of funds.
The SBP governor said that in an uncertain macro environment, banks were reluctant to advance long-term loans to the private sector and often resorted to short-term lending. It implied that in the absence of corporate debt market, firms would find it difficult to raise funding for long-term investment projects, he observed. He further said that essentially, the short-term nature of bank lending will bias capital investment in general, and may exacerbate cyclical fluctuations in economic activity. "This will be particularly true in industries where costs are recovered over a much longer-term. Such industries include construction, power generation, etc," he added.
He pointed out that in most countries, the government as the largest issuer of debt securities provided the volume required for a liquid secondary market. In Pakistan, however, PIBs were unable to serve it for two reasons - first, the market was not sufficiently liquid and secondly, there was no benchmark for private bonds that were issued for a tenor of between 5 and 8 years since PIBs were only available in maturities of 5 and 10 years, he explained.
Anwar said that the competition from the government for the same pool of savings undermined progress towards greater financial deepening. The risk-free nature of investment in various NSS schemes, their ad-hoc rate adjustment, and the ability to redeem prematurely, dominated any corporate bond in the market, he said, adding that the private sector, therefore, had to issue bonds that carried a higher interest rate than NSS rates to compensate for the risk of default that the private sector carries.
"This makes the issuance of corporate sector debt expensive," he added. He suggested that the process for primary issuance of corporate debt should be simpler one and fast track so that a corporate could raise funds quickly when conditions were favourable for debt issuance.
"Shelf registration is an efficient way of issuing the debt instruments as it saves the cost and time. Although, in Pakistan we have shelf registration for corporate bonds but it usually takes long time for the approval process," he said and added that considering the persistently thin volumes on BATS developed by KSE, market participants should be encouraged to use Bloomberg EBND, which traded almost 65% of volumes, also trading in corporate debt instruments.
The SBP Governor said that the appetite for raising debt on the capital markets was also an issue. Corporates were reluctant to approach the bond market because of the disclosure requirements, and their preference to remain undocumented, he said and added that the corporate culture in the country must change so that family-owned businesses were not constrained from future growth.
Anwar recalled that the country fiscal deficit was not unmanageable, "but we need to deepen our financial markets to ensure that any adverse development on the fiscal side of affairs does not negatively impact the pool of credit available to the private sector. There is immense room for improvement when it comes to financial deepening through bond markets," he concluded.
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