Level Playing Field between NBFI and Banks

1. The leasing industry which commenced in the mid-80s with only two pure leasing
companies has grown significantly with about 28 Non-bank financial institutions N!"#s$
now acti%ely competing for business in the financial market. &urrently' out of 28 N!"#s'
22 speciali(e in lease business and out of 22 leasing companies) only eight are listed on the
e*changes. +ince its introduction' leasing has been popular and con%enient for both large
and small business' and this resulted in an impressi%e growth of annual lease e*ecution
%olumes o%er the last twenty years. Today' leasing continues to play a catalytic role in
pro%iding alternati%e source of capital asset financing to the pri%ate sector. The total asset
e*posure of N!"#s has since e*ceeded !,T -. billion.
Legal and Regulatory Framework
2. #nitially the N!"#s were used to be regulated by the !angladesh !ank under &hapter-/ of
the !angladesh !ank 0rder 1122. 3ith the initial success of the N!"#s' sudden increase of
numbers and the significant contribution to the national economy of !angladesh as an
alternate source of finance' the 4o%ernment felt the necessity of ha%ing a legal framework
to license' regulate and monitor the acti%ities of N!"#s and hence enacted the "inancial
#nstitution 5cts' 1116. The 5ct codified into law a number of prudential financial norms
for conducting the lending operation of N!"#s and !angladesh !ank has been entrusted
with the responsibilities for super%ision and implementation of the 5ct.
6. N!"#s are re7uired to submit monthly' 7uarterly' semi-annually and annual reports on their
operational performance to the !angladesh !ank. #n addition' they are re7uired to furnish
monthly statements on the position of their li7uid assets and liabilities as well as public
deposits and cash reser%es maintained with the &entral !ank' as these regulatory
re7uirements was for !anks too.
8. 9rior appro%al has to be obtained from the +ecurities and :*change &ommission for
issuance of shares' debentures and bonds. 9ermission from !angladesh !ank as well as the
!angladesh :*port 9rocessing ;one 5uthority is re7uired to finance in foreign currency
through an off-shore unit in the :*port 9rocessing ;ones.
.. The other significant regulations include maintenance of minimum capital' reser%e funds'
publication of annual and semi-annual financial statements in leading daily newspapers'
restriction on foreign e*change dealings' call borrowing limits' restriction on holding
mo%able property' multiple directorships' shareholding limit' holding of li7uid assets' etc.
<easing companies are allowed to import lease e7uipment in their own names.
-. !angladesh !ank decides the minimum capital base of any N!"# licensed under the
"inancial #nstitution 5ct' 1116 of !angladesh !ank which is' at present' !,T 2.0 million
or -= of the total liabilities' whiche%er is higher.
2. 3ith the adoption of #5+ No. 12 by the #nstitute of &hartered 5ccountants of !angladesh
#&5!$' it has become mandatory for the leasing companies to follow financing method of
accounting for financial reporting' under which the leased assets are shown as fi*ed assets
in the books of the lessee with a corresponding liability and future rental recei%ables
shown as recei%ables in the books of leasing companies.
8. 5 lessor appro%ed by National !oard of >e%enue is entitled to the following ta*
e*emptions?
Three years ta* e*emption on income of e*patriate personnel employed by lessor.
4o%ernment e*empted deduction of /5T from lease rentals.
@owe%er' allowance for doubtful accounts pro%isions for credits$ is not allowed for ta*
purposes' as it is for !anks.
NBFIs Sub-sector Profile, Structure and Performance
1. 3ith the arri%al of new N!"#s' particularly leasing companies' as well as some banks
offering leasing ser%ices' the market is becoming more competiti%e and the market share is
being spread o%er the companies.
10. The acti%ities of N!"#s ha%e witnessed a phenomenal growth during the last fi%e years.
The business %olumes and the balance sheet si(es ha%e multiplied many times. <easing'
@ire 9urchase' Term "inance' 3ork 0rder "inance' >ecei%able "inance "actoring$' @ome
<oan' &apital Aarket 0peration disbursements by N!"#s are poised to cross !,T 1.
billion per annum. 5ccording to the latest statistics recei%ed from !angladesh !ank' the
o%erall credit portfolio of N!"#s grew by 6-= in 2008 and stood at !,T 88.. billion. ,ue
to effecti%e credit management policies' the collection rate in the sector is also %ery
impressi%e at around 1.=' while the non-performing loans constitute around 6.2=. 5mong
the in%estment portfolio mi* of N!"#s' lease finance is still dominant one constituting .-=
of total in%estment though declining o%er the years' followed by term finance and home
loan respecti%ely carrying 20= and 1-= respecti%ely. The following table illustrates the
in%estment portfolio mi* of N!"#s?
Investment Portfolio i! of NBFIs "ver Last Five #ears
#n%estment 9ortfolio 2000 2001 2002 2006 2008
Lease-Loan -2.8= -..2= -8.1= -6..= .-.2=
Hire Purchase 0.0= 0..= 1.1= 0.2= 0.2=
Term Finance 10..= 11.6= 12.6= 1..1= 20.0=
Home Loan 18.1= 1-.1= 12.2= 1..8= 1..-=
Short Term Loan 2.1= ..-= 8..= 8.1= 2..=
11. The country leasing industry' in terms of annual lease e*ecution' has grown at an estimated
rate of 22= and 28= in the years 2006 and 2008' respecti%ely. This has been possible
mainly due to e*pansion of the market brought about by the combined dri%e of the new
entrants' N!"#s and !anks' as well as the established N!"#s. The following graph
illustrates the growth of lease e*ecution in the last successi%e fi%e years.
4.8
6.2
7.9
10
12.8
34%
25.5%
27.8%
26.6%
28.0%
0
2
4
6
8
10
12
14
2000 2001 2002 2003 2004
Year
A
n
n
u
a
l

L
e
a
s
e

E
x
e
c
u
t
i
o
n

(
B
D
T

i
n

B
i
l
l
i
o
n
)
0%
5%
10%
15%
20%
25%
30%
35%
40%
G
r
o
w
t
h

R
a
t
e
Annual Lease Execution Growth rate
+ource? !angladesh <easing B "inance &ompanies 5ssociation
5s the si(e of the leasing portfolio increases' the market growth rate has stabili(ed o%er the
last few years. This growth trend reflects the preference and gradual shift towards lease
finance by the houses and in%estors due to faster ser%ice' ta* benefit' rela*ed or no
collateral re7uirement' and simplified documentation.
12. The lease-loan outstanding of N!"#s grew by 62= in 2008 and stood at !,T 61.2 billion.
The growth of leasing can be grasped from the following graph?
Lease-loan
7500
10100
23200
31800
16200
0
5000
10000
15000
20000
25000
30000
35000
1999 2000 2001 2002 2003 2004 2005
Year
T
a
k
a

i
n

M
i
l
l
i
o
n
4rowth of <easing in !angladesh
16. The o%erall performance of N!"#s' on a number of counts' has been impressi%e o%er the
years. The re%enue operating income$ of N!"#s has increased to !,T 8.16 billion in 2008
from !,T -.81 billion in 2006 growing at a rate of 62= and 22= in the years 2006 and
2008 respecti%ely. 0n the other' financial e*penses increased to !,T 6.- billion in 2008
from !,T 2.11 billion ha%ing a rate of 68= and 21= in the years of 2006 and 2008
respecti%ely. The following charts show the position of re%enue and financial e*penses?
2414.63
3563.98
4844.06
6416.98
8128.27
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
T
k
.

i
n

M
i
l
l
i
o
n
2000 2001 2002 2003 2004
Year
REVE!E o" B#$s
879.04
1378.93
2149.79
2984.91
3613.03
0.00
500.00
1000.00
1500.00
2000.00
2500.00
3000.00
3500.00
4000.00
T
a
k
a

i
n

M
i
l
l
i
o
n
2000 2001 2002 2003 2004
Year
#inancial Ex%ense o" B#$s
@owe%er' financial e*penses constituted -0= of the total e*penses in the year of 2008 as
seen from the pie chart of the distribution of e*penses of N!"#s and this relati%e financial
e*pense "in. :*p. e*pressed as a = of either total e*penses or income from in%estment$
continued to increase o%er the years till 2006 and then a bit declined in 2008 5ppendi*$.
@ence the cost of funding continued to increase e*cept for 2008 and became a constraint
for the growth of N!"#s.
Distri&ution o" Ex%enses &' Ma(or Ex%ense
)ea*s in +,,-
Allowance !or
"ou#t!ul "e#ts
5.7%
$e%reciation
6.7%
A"&inistrati'e
Ex%enses
11.8%
(ther
Ex%enses
16.1%
)inancial
Ex%enses
59.7%
#t is re%ealed from the table of selected indicators of N!"#s performance that the loan to
deposit ratio of N!"#s continued to fall but still remained a 7uite high of ..- times in 2008
suggesting that N!"#s continued to tap other sources of funds for pursuing their growth.
&ost of funds of N!"#s continued to rise o%er the years to 1.2= in 2006 and then to
decline to 8.1= in 2008. :stimated net yield Net #nterest #ncome as a = of 5%g. :arning
5ssets$ and &ore profitability 0perating 9rofit as a = of 5%g. Total 5ssets$ ha%e declined
o%er the last four consecuti%e years showing that margins of N!"#s were being narrowed
down. #t is noted here that the much publici(ed downward dri%e of the interest rate
structure' with the promise of lending rates by the commercial banks coming down to
single digit at the end of 2008' created a serious pressure on pricing' not only on the new
contracts being written but also on e*isting portfolio. @owe%er' the subse7uent re%ersal not
only seriously impacted the o%erall funding cost' both new and old obligations' but also in
the process they s7uee(ed the already narrowing margin as this re%ersal of cost could not
be passed on wholly to the clients due to the competiti%e pressure. #n addition' on a sample
of big - N!"#s' it is estimated that funding mismatch weighted a%erage terms of monetary
liabilities minus weighted a%erage terms of monetary assets$ was -6.80 months on a%erage
in 2008 reflecting aggressi%e operation of N!"#s and around 2.8 per cent turned out to be
the creditCin%estment portfolio infection rate. @owe%er' N!"#s were able to reduce
pro%isions to in%estment o%er the years to 6.2= in 2008 and maintain the re7uirement of
ade7uacy of loss pro%isions.
Selected Indicators of Performance of NBFIs
#ndicators 2000 2001 2002 2006 2008
<T <iability to #n%estment =$ 22.68 22.81 28.08 8-.20 22.18
<oansC,eposits Times$ 28.2- 10.-0 10.08 ..12 ...2
"in. :*p. &o%erage >atio Times$ 1.81 1.-1 1..2 1..1 1..2
&ost of funds =$ 2.82 8.-8 1..0 1.28 8.12
:stimated Net Dield =$ 2.81 8.11 -.81 -.-1 ..1-
&ore 9rofitability =$ -.80 2.12 2.20 2.11 -.-8
9ro%ision to in%estments =$ 8.08 6..1 6.8- 6.66 6.21
>eturn on 5%g. :arning 5ssets =$ 6.08 2.81 2.21 2.-6 2.86
$n*icators o" .er"or/ance o" B#$s
2.00
4.00
6.00
8.00
10.00
12.00
1999 2000 2001 2002 2003 2004 2005
Year
0

o
"

1
o
s
t
2
Y
i
e
l
*
*ost o! !un"s Esti&ate" +et ,iel"
*ore -ro!ita#ilit. -ro'ision to in'est&ents
Sources of Funding for NBFIs
18. N!"#s utili(e funds from a wide array of sources including financial instruments share'
debentures and bonds$' credit lines and call loans from banks and financial institutions as
well as deposits from institutions and the public. #t is seen from the pie chart of the sources
of funds of N!"#s that lines of credit from banks constitute -0..= of total funds and hence
remain one of the principal sources of funding for N!"#s' which makes the cost of funds of
such financial institutions higher than banks. #n the competiti%e market scenario' N!"#s'
therefore operate on %ery thin margins. This principal source is followed by call loan from
the inter-bank call money market.
3ources o" #un*s o" All B#$s in +,,-
$e%osit
12.5%
*all Loan
an" ('er"ra!t
14.9%
E/uit.
12.1%
Line o! *re"it
60.5%
1.. @owe%er' the e*cessi%e dependence on banks has had an e*tremely ad%erse impact on the
leasing industry in the first half of 200.. ,ue to the li7uidity crunch in the financial
markets' the a%erage rate of interest on bank credit lines rose from the e*isting range of 11-
12= to 12-18=. The situation went worse when a number of banks were not allowing the
N!"#s to draw funds from their appro%ed credit lines. #n such an e*treme situation' with
the e*ception of a few established N!"#s' which had a considerable amount of public
deposits' most of the others had to choose between borrowing at %ery high rates of from
the inter-bank call money market or completely stopping all disbursements.
1-. "or banks' the public deposit is one of the maEor sources of funds and therefore' pro%ides
an indication of the cost of fund. #t is obser%ed from the following table that weighted
a%erage bank deposit interest rate at the end of ,ecember' 2008 came down to ...-= from
2.08= at the end of 2000.
$eig%ted &verage 'e(osit Rates
Period
N)Bs P)Bs F)Bs 'FIs &ll Banks
*+-+,-,--- ./*0 0/.1 1/-2 3/.0 ./-3
*+-+,-,--+ 0/4- 0/32 2/-2 ./40 0/.1
*+-+,-,--, 0/,. ./-. 2/1. 0/33 0/24
*+-+,-,--* 1/3, 0/44 2/.3 0/,, 0/,1
*+-+,-,--2 2/33 0/20 2/-- 1/24 1/10
+ource? +tatistics ,epartment' !angladesh !ank.
"rom the table below' it is e%ident that nominal banksF lending rates in !angladesh are
high' though they ha%e fallen from 16.2.= at the end of ,ecember' 2000 to 10.86= at the
end of ,ecember' 2008. Nominal lending rates of the "&!s are lower than those of 9&!s
and ha%e fallen from 12.-8= to 11.8.= o%er this period as compared to 18.21= to
12.00=. #t is also obser%ed that during the last . years' the spreads of lending and deposit
rates remain within the range at -.2 to ..22 percent.
Nominal Banks5 Lending Rates
9eriod
N)Bs P)Bs F)Bs 'FIs &ll Banks
*+-+,-,--- +*/*0 +2/.+ +,/03 +*/2, +*/.1
*+-+,-,--+ +,/4* +2/*4 +,/,. +*/-, +*/2,
*+-+,-,--, +,/2, +2/+, ++/4. +,/3- +*/-4
*+-+,-,--* ++/14 +*/12 +,/+- +-/4* +,/*0
*+-+,-,--2 4/.1 +,/-- ++/21 4/+4 +-/3*
+ource? +tatistics department' !angladesh !ank.
3hen we consider the income and e*penditure method in accordance with international
practice' whereby total interest income i.e. interest yields on ad%ances' in%estment and
money at call and short notice$ and total interest e*penses i.e. interest e*penses on
deposits' borrowing including short term borrowing$ should be considered for compilation
of the cost of fund and interest rate spread' cost of funds interest e*pense as a percentage
of total interest bearing liabilities$ of all banks came down to 8.-8= at the end of
,ecember' 2008 from -.06= in 2006.
S(read based on 6otal Interest Income and 7!(enses/
Taka in billion $
9eriod #tems
4roup !anks
N&!s 9&!s "&!s ,"#s 5ll !anks
,ec
2006
Total #nterest :arning 5ssets 828.-0 822.08 21.0. 101.26 1022.8.
Total #nterest #ncome 68.11 82.82 10.62 8.21 12.81
Percentage #ields on 7arning 8&9 ./*0 ++/** +2/0- 2/,4 4/-3
Total #nterest !earing <iabilities .12.2. 881.12 28.-1 10-.01 1161.8-
Total #nterest :*penses 22.1. 62.1. ...2 6.01 -8.2.
Percentage of Interest 7!(enses8B9 1/21 ./,. ./-3 ,/4+ 0/-*
Interest Rate S(read 8&-B9 +/4+ 2/-0 ./1, +/*3 */-2
,ec
2008
Total #nterest :arning 5ssets .60.-1 .21.1- 1-.82 116.10 12-1.21
Total #nterest #ncome 61.2- 82.2- -.66 8.61 81.2.
Percentage #ields on 7arning 8&9 1/44 3/4* 0/1. */33 ./-.
Total #nterest !earing <iabilities ..6.6- .22.01 88.68 12-..6 1680.26
Total #nterest :*penses 2-.88 21.1- 2.-6 6.16 -2.1.
Percentage of Interest 7!(enses8B9 2/.3 1/,2 ,/4. ,/2. 2/02
Interest Rate S(read 8&-B9 +/,+ */04 */14 +/2+ ,/2*
+ource? +tatistics ,epartment and 0ffsite +uper%ision ,epartment' !angladesh !ank.
12. @owe%er' the banking sector has played the dominant role in financing the in%estment
re7uirements of the pri%ate sector in !angladesh. #n "D 2008' industrial loans
disbursement by banks and financial institutions amounted to Tk. --.8 billion. The high
dominance of bank loans in in%estment financing means low stake and risk e*posure of the
owners' on the one hand and a disproportionately high risk on the lending banks and
financial institutions on the other. !anks also are e*posed to asset-liability management
risk arising from long term loans with shorter term deposits. +uch risks faced by one bank
can spread to other banks and the risks faced by the financial system can easily spread to
the real sector with potentially serious conse7uences for the economy.
18. The problems and inefficiency in the banking system ad%ersely affect the allocati%e
efficiency of resources which banks intermediate. This makes the growth contribution of
in%estment financed by bank loans significantly lower. 5 high le%el of non performing
assets loans$ of the banking system reflects wasted resources and lost opportunities in
terms of growth and employment. The non performing loans to net assets of !angladesh
banking system has declined significantly in recent years from 28..= in 2000 to 10.1= at
the end of ,ecember' 2008 but is much higher than around .= of N!"#s at the end of
2008.
11. #n !angladesh' the financial market is e*tremely competiti%e with 81 banks and 28 N!"#s.
The competiti%e en%ironment for N!"#s is e%en more challenging' as they ha%e to compete
with banks which ha%e low cost and e%en (ero cost funds in their funding basket. 4i%en
this situation' certain issues ha%e cropped up during the last few years largely due to
unprecedented growth and it has become imperati%e that such issues are associated
forthwith if the N!"#s are to secure the rightful place as a catalyst for economic growth.
20. The facets of liability management in a N!"# ha%e undergone maEor changes during the
last few years. ,emand for funds to meet the increasing re7uirement has increased
manifold. N!"#s are mostly dependent on the credit lines of commercial banks' the
a%ailability of which is becoming inade7uate day by day. :ntry of commercial banks and
,e%elopment "inancing #nstitutions in to the business of leasing and hire purchase
pro%ides further twist to the tale. Therefore' the N!"#s ha%e to recourse the capital market
for raising funds. :*ternal commercial borrowings also appear to be not promising for the
economy like ours. "luctuations in the o%er night borrowing rate ha%e added fuel to the
fire. The ability to manage the escalating interest rate cur%e while keeping the business
going is a maEor concern of many N!"#s.
21. To sustain the high cost off borrowing' the N!"#s ha%e increasingly resorted to high risks'
high return segments for deployment. Gnless risk management capabilities are de%eloped'
the proposed gains would be an illusion. #n%estment in capable risk system and control
would be the only way to ride the risks successfully.
22. ,ifficulties in the reco%ery of leased assets in case of default combined with the delays in
court procedure are another cause of concern. #mpro%ement of legal system can not be
achie%ed only by enacting of laws rather by proper implementation thus generating
confidence in them by all concerned.
26. #n the e%ent any financial asset is repossessed from the default client' the disposal of the
same is another cause of concern because of lack of established secondary market. "or
promotion of secondary market' the N!"#s' particularly those who ha%e large and si(eable
operations' should start operating lease which would create a demand for second hand or
used machinery and e7uipment like the market of usedCreconditioned %ehicles.
28. <ending and leasing are two different mode of financing' their concept and procedure
particularly the accounting and ta*ation system are 7uite different. Ai*ing up of the two
systems would destroy the basic financial norms in one hand' and on the other hand ta*
e%asion may take place because of ignorance as well as moral ha(ards. Aoreo%er' banks
and N!"#s are complementary to each other as far as their functional relationship is
concerned. Therefore' it is ad%isable to take one of the following two options or both?
#f any bank desires to go into leasing business they should proceed with opening
of subsidiaries. 3ith this' the ethical and technical norms of the leasing industry
can be maintained.
!anks not doing leasing business may get in%ol%ed in the same through Eoint
financing under syndication arrangements with leasing companys$ on any
proEect proposal. 5s for e*ample' in case of an industrial proEect four things are
essential 1$ <and and building' 2$ capital machineries' 6$ working capital' and
8$ importCe*port transactions. 0ut of these' +l. No. 1 is normally pro%ided by
the sponsors. +l. No. 2' 6 and 8 are the items to be pro%ided by banks and leasing
companies. !anks are by and large' shy to go in for long term in%estment.
&apital machineries may therefore' be allotted to leasing companies to finance.
!anks are to pro%ide working capital and carry on the foreign e*change part of
the business. #n this conte*t' it may be mentioned that e%en if banks are able to
finance capital machineries' they should not be allowed to do so rather if need be
they will place their funds with the leasing company to e*tend lease facility for
those machineries. This is necessary for two reasons. "irst' in case of lease
facility' the machineries will remain under ownership of leasing companies' who
will ha%e' absolute authority and control on their assets. +econd' machineries
will be imported in the name of leasing company and letter of credit will be
opened in their name. +o' o%er in%oicing or under in%oicing may be a%erted and
thereby more transparency will be ensured and ta* e%asion may be plugged.