The performance of investment banks and leasing companies could be weakened, going forward, according to Pakistan Credit Rating Agency (Pacra). Various broad socio-economic risks, including widening fiscal deficit, slowing GDP growth, rising inflation, squeezing foreign reserves, depreciating Pak rupee, and worsening law and order situation have significantly amplified the challenges for this sector, Pacra analysts say.
These negative developments, while provoking a general downturn in the whole economy, have brought liquidity crunch in the overall financial industry. In terms of business prospects, the sector faces stiff competition from commercial banks, which also offer homogeneous products and services at relatively competitive prices.
Investment banks and leasing companies, a segment of non-banking finance industry, play a crucial role in the overall financial structure of Pakistan. The sector, besides broadening access to financial services, encourages and enhances the investment and saving options in the economy. The sector has experienced a significant transformation and consolidation since the implementation of 'Non-Banking Finance Companies Rules' in 2003, under which among other factors their risk management framework and equity base are strengthened.
According to Pacra, investment banks and leasing companies have limited direct access to depositors and rely heavily on interbank short-term funding. In current environment, where banks are facing liquidity squeeze, the borrowing lines for this sector have been curtailed, making the liquidity management difficult.
At the same time, the financing cost of rollovers has also gone up. Adding to the problems, the meltdown and recent freezing of the stock market, while negatively impacting the earnings from this source, has put further pressure on the liquidity and cash flow positions.
Meanwhile, given the prevailing economic turmoil, which has unexpectedly prolonged, it would be difficult for the sector to find new avenues for its targeted business expansion, at least over the near-term.
Auto leasing and financing, which comprises major part of overall leasing operations of this sector, halted because of declining purchasing power of consumers, mainly an outcome of high inflation and interest cost. Moreover, the corporate sector is also affected by the rising interest rates scenario, and has put on hold most of the expansion plans, thereby reducing the demand for credit. Hence, any significant deterioration in the asset quality may lead to a decline in their risk absorption capacity.
However, the companies, having diversified product base, along with long-term credit facilities available to support their asset/liability management, are expected to withstand their competitive positioning in the sector. Pacra, as a part of its ongoing surveillance, is monitoring all developments very closely, and may take a client-specific rating action wherever it is deems appropriate.