Margin financing to replace badla by January 1

The Chairman, Securities Exchange Commission of Pakistan, Dr Tariq Hassan, has told bankers that 'badla' financing is being gradually phased out and hopefully would be replaced by margin financing by January 1, 2005. Therefore, he said, banks need to gear up their system to meet this challenge.
Speaking at a meeting of State Bank of Pakistan with the representatives of Pakistan Banks Association (PBA), chaired by SBP Governor Dr Ishrat Husain, here on Thursday, he said at present Rs 29 billion of liquidity was being provided to the bourses under the 'badla' mechanism.
The SECP intends to reduce the number of scrips in this mechanism and ultimately abolish it. He said the present system allows manipulation of trading on the exchanges by a few powerful players.
The SBP governor said that India has successfully abolished the 'badla' system and now margin financing is widespread in their banking system. Pakistani banks also need to put the right technology in place and train the manpower required for this purpose.
Regarding, the SBP regulations for 5 percent provisioning against consumer loan, it was agreed at the meeting that loans given to staff of the banks did not require provisioning as the retirement benefit can be utilised to protect default.
The bankers pressed the central bank that it would be difficult for them to provide 5 percent provisioning against consumer loans in one go. Further, he said that this would add to the cost and make consumer loan expensive thereby hurting the growth of consumer financing. As such, the provisioning requirement needed to be reduced and subsequently increased and phased out over a period of time.
Dr Ishrat Husain said that his concern emanates from default taking place when the lending rates increased. He said that in a low interest rate environment it was not an issue. However no final decision was taken and further discussion would take place at the next meeting between SBP and PBA. Another issue, discussed at the meeting related to holding of federal investment bonds by banks.
It was decided that FIBs being held until maturity did not need to be taken into profit and loss account on mark-to-market basis. The tradable FIBs, however, would be valued on mark-to-market basis. There was also a detailed presentation at the meeting by SBP's risk management team on derivative as a banking product. Proposals were discussed about risk parameters that need to be in place to develop derivatives market in the country.