On TFCs in Pakistan

Already low, the issuance of term finance certificates (TFCs) has become associated mostly with banks in Pakistan. Silk bank is reportedly planning to issue Rs2 billion TFC this year to meet its capital adequacy requirements. This TFC, which will be privately-placed, unsecured, and subordinated debt, will have semiannual coupons and a tenor of 8 years.

Commercial banks dominate the TFC market locally because TFCs, which are essentially subordinated loans and help the bankers beef up their capital structure and meet regulatory requirements. Banks dominate some of the recently-listed TFCs, as shown in the illustration.

Among the non-listed TFCs as well, banks dominate, with active issues of many small and mid-sized banks such as Standard Chartered, Askari Bank, Faysal Bank, Bank Al-Habib, Bank of Punjab, JS Bank, and NRSP Microfinance Bank. Only a handful non-banking companies, including K Electric, JDW Group, JS & Co., and Wapda have outstanding TFCs in the market.

A market had started developing for corporate TFCs back in the heydays of the Shaukat Aziz government in the mid-2000. But after a few issuances, the momentum was soon wiped out after odd experiences with a couple of firms.

For three important reasons, the local market for TFCs needs to expand beyond commercial banks.

One is that the corporates, which enjoy prominence in private sector credit, can meet their financing needs on the cheap through TFC issuance. When Engro Corp. issued Engro Rupiya back in 2010-11, it was able to meet its financing requirements at an overall lower cost than the alternative of bank financing. This is the case in the developed markets where corporates also rely on capital debt markets for fresh funding.

Two, if enough corporates find the TFC option attractive; it may not only make bank lending more competitive, but also free up and channel some of the lending resources for SMEs down the pyramid. If banks start facing competition in the market, their long-running risk aversion – manifested in the sinecure of investing in government papers and lending to already-established corporates – may be fixed.

And three, retail depositors could also use an alternative to commercial banking, where bankers are seen more interested in opening current accounts and offer unattractive rates unless the deposit is really large. Good thing about TFCs, and other such debt instruments, is that they don’t discriminate between big and small investors, by offering everyone the same coupon. The overwhelming retail response to Engro Rupiya suggests the appetite on part of small depositors. The country needs to expand and deepen its debt market with more issuance of TFCs and other debt instruments. A functioning and liquid secondary bond market is essential to that objective. Eight years on, the Karachi Bond Automated Trading System hasn’t generated much activity, on either government or corporate securities. The vested interests that are maintaining the status quo need to be taken on.