The Securities and Exchange Commission of Pakistan (SECP) has introduced major amendments to the regulatory framework for NBFCs through a separate regulatory regime to encourage small and mid-sized lending NBFCs with significantly reduced equity requirements.
Official sources told Business Recorder on Monday that the NBFCs include Assets Management Companies, Pension Fund Managers, Real Estate Investment Trust (REIT) Management Companies, Private Equity Fund Managers, Leasing Companies, Housing Finance Companies and Investment Finance Companies ie Investment banks engaged in Investment Finance Services. Instead of following a one-size-fits-all strategy, a careful and detailed study of each activity of NBF sector was carried out by the SECP before suggesting a practicable and conducive regulatory framework.
Under the plan, the equity requirements of Rs 50 million have been proposed for non-deposit taking leasing companies and housing finance companies against existing requirements of Rs 700 million. Similarly, the equity requirements for undertaking investment finance services ie general lending has been reduced from Rs 1,000 million to Rs 150 million. Moreover, housing finance companies, in addition to the consumer financing, have been permitted to undertake commercial housing finance activities.
NBFCs have been allowed to undertake micro finance business. In this connection, a new class of NBFCs ie Non-Bank Micro Finance Companies (NBMFCs) has been introduced. Comprehensive framework for providing finance to poor persons and micro enterprises including conduct requirements for NBMFCs has also been proposed. This will also enable SECP to regulate the micro finance institutions other than micro finance banks, sources said.
The existing companies other than NBFCs have been allowed to apply for license to carry out lending activities subject to the fulfilment of prescribed eligibility criteria under the proposed regulatory regime. For instance, an equipment manufacturer, producer of home appliances or automobile assembler may start leasing of its own product as an ancillary activity by obtaining leasing license. These proposed amendments are likely to boost lending business in a regulated environment. For supporting SME sector, the paid up capital requirement for REIT management company has already been reduced from Rs 200 million to Rs 50 million only. The fund size requirement of Rs 2 billion for REIT Scheme has been abolished and brought in line with the listing requirements of the stock exchange.
In addition, a new set of Private Fund Regulations has also been proposed. In order to encourage private fund management, the eligibility criteria for fund management company has been redefined and now even a single member company may obtain license for private fund management. Further, the fund management company may launch private funds with varied objectives of investing in wide range of financial assets including equity securities, debt securities etc. The minimum fund size requirement of Rs 250 million and the cap on maximum holding by a single party has been removed. The limit for minimum investment by eligible investor has also been proposed to be reduced from Rs 10 million to Rs 3 million.
Sources said that another attractive avenue for the small entrepreneurs to enter into financial sector is already there ie floatation and management of Modaraba. Under the existing regulatory regime, a company with the paid up capital of Rs 2.5 million only may undertake the business of management of Modarabas. Further, prevalent regulatory regime does not require any minimum equity for Modarabas.
Apart from the introduction of the said measures, other amendments have also been suggested for the growth and development of NBF Sector. Asset management companies have been allowed to undertake other fund management activities ie management of REIT schemes and private pool of funds. In order to ensure operational viability and better risk management, mandatory requirements of capital adequacy ratio, capping of deposit taking ability, rationalisation of leveraging capacity, etc have been proposed for deposit taking NBFCs to minimise the default risk. The objective of these amendments is to support the growth of NBF Sector in a prudential manner while assisting financial innovations.
To facilitate the different segments of NBF Sector and considering their size and diverse nature of activities, separate eligibility criteria encompassing several aspects such as type of company, number of directors, rating requirements etc have been prescribed for each class of NBFCs.
It is expected that the new initiatives would be supporting in the development and promotion of a sound and robust NBF sector in order to diversify the inherent systemic risk and to enhance the resilience of the financial system. Moreover, a strong NBF sector would not only promote savings by offering different asset classes to the investors but would also provide alternative fund raising opportunities to the participants of financial system. Hence it can play an important role in channelling investments towards underserved economic sectors and those sectors that need special attention such as micro finance, SME financing, social services, agriculture, housing, infrastructure development, they added.
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