PC backs reduction in SME Bank’s capital requirement
Postpones approval of transaction structure for the bank’s privatisation
Postpones approval of transaction structure for the bank’s privatisation. CREATIVE COMMONS
ISLAMABAD:
The Privatisation Commission (PC) board has put off approval of a transaction structure for the sale of SME Bank after observing that the minimum capital requirement of Rs6 billion set by the State Bank of Pakistan (SBP) for the prospective buyers is at the higher end.
The board, which met last week, endorsed a recommendation of the financial advisers, which sought at least one-third reduction in the minimum capital requirement to Rs4 billion aimed at making the bank attractive for the buyers.
The sponsors will have to arrange cash to meet the regulatory cash requirement as well as pay the sale price to the government.
SME Bank - the only specialised financial institution for lending to small and medium-sized enterprises, is up for grabs. Although the bank’s financial condition is not good, its licence is very pricey given the fact that the central bank is not issuing new licences for commercial banks.
The SME Bank’s current licence is not of a specialised nature and it may venture into commercial banking. However, the SBP will withdraw this unrestrictive licence and issue a new specialised banking licence to the investors at a reduced MCR (minimum capital requirement), according to the proposed transaction structure.
Still, this will be an opportunity for the private sector to venture into the untapped SME sector.
Banks’ unwillingness
Banks are reluctant to lend to small and medium-sized industries, which is an obstacle to their growth besides restricting expansion of the sector.
The country’s exports may triple in five years and a million more jobs may be created by providing an enabling business environment for the SME sector, according to a plan prepared by the Small and Medium Enterprises Development Authority (Smeda) three years ago.
The plan remains unimplemented, as the sector falls to the bottom of the government’s priority. Instead of turning SME Bank financially viable through restructuring, the government is going to sell it out. It wants to fast-track the bank’s privatisation after support of the central bank instead of merging it with National Bank of Pakistan (NBP) or injecting equity.
The PC had appointed a consortium of Elixir Securities and Bridgefactor as financial advisers for the privatisation of SME Bank. They had recommended that the MCR may be lowered to Rs4 billion, but the central bank did not accept it.
The central bank has communicated that the bank’s MCR will be Rs6 billion. An amount of Rs5 billion will be upfront including Rs2 billion as subordinated debt. The remaining Rs1 billion will have to be added in the next two years.
The subordinated debt of Rs2 billion will be redeemable by the sponsors within five years. In case, the sponsors fail to meet the MCR within five years, the bank will be required to convert the subordinated debt into common equity.
SBP’s role
The PC chairman and the SBP governor are expected to hold a meeting to sort out the MCR issue, according to PC officials.
The government holds 93.89% stake in SME Bank. The bank has a paid-up capital of Rs2.39 billion against the requirement of Rs6 billion. Its accumulated losses stood at Rs2.5 billion and book value per share was Rs0.91 only in June 2016.
The financial advisers have warned that the MCR shortfall indicates a material uncertainty regarding the bank’s ability to continue as a going concern and the bank may be unable to realise assets and discharge its liabilities.
They have also informed the PC that at the current rate of cash burnout, there is a possibility that the bank’s equity will become negative by the end of this year.
The advisers have also recommended that the Rs4.88 billion legacy portfolio of the SME Bank should not be part of the privatisation transaction. The bank had inherited this portfolio from the defunct Regional Development Finance Corporation and Small Business Finance Corporation.
The bank’s Rs8 billion advances include Rs4.9 billion legacy portfolio. In 2010, the SME Bank had handed over Rs5.5-billion recoveries to NBP. These loans are up to 35 years’ old and chances of recovery are negligible.
Published in The Express Tribune, November 23rd, 2016.
The Privatisation Commission (PC) board has put off approval of a transaction structure for the sale of SME Bank after observing that the minimum capital requirement of Rs6 billion set by the State Bank of Pakistan (SBP) for the prospective buyers is at the higher end.
The board, which met last week, endorsed a recommendation of the financial advisers, which sought at least one-third reduction in the minimum capital requirement to Rs4 billion aimed at making the bank attractive for the buyers.
The sponsors will have to arrange cash to meet the regulatory cash requirement as well as pay the sale price to the government.
SME Bank - the only specialised financial institution for lending to small and medium-sized enterprises, is up for grabs. Although the bank’s financial condition is not good, its licence is very pricey given the fact that the central bank is not issuing new licences for commercial banks.
The SME Bank’s current licence is not of a specialised nature and it may venture into commercial banking. However, the SBP will withdraw this unrestrictive licence and issue a new specialised banking licence to the investors at a reduced MCR (minimum capital requirement), according to the proposed transaction structure.
Still, this will be an opportunity for the private sector to venture into the untapped SME sector.
Banks’ unwillingness
Banks are reluctant to lend to small and medium-sized industries, which is an obstacle to their growth besides restricting expansion of the sector.
The country’s exports may triple in five years and a million more jobs may be created by providing an enabling business environment for the SME sector, according to a plan prepared by the Small and Medium Enterprises Development Authority (Smeda) three years ago.
The plan remains unimplemented, as the sector falls to the bottom of the government’s priority. Instead of turning SME Bank financially viable through restructuring, the government is going to sell it out. It wants to fast-track the bank’s privatisation after support of the central bank instead of merging it with National Bank of Pakistan (NBP) or injecting equity.
The PC had appointed a consortium of Elixir Securities and Bridgefactor as financial advisers for the privatisation of SME Bank. They had recommended that the MCR may be lowered to Rs4 billion, but the central bank did not accept it.
The central bank has communicated that the bank’s MCR will be Rs6 billion. An amount of Rs5 billion will be upfront including Rs2 billion as subordinated debt. The remaining Rs1 billion will have to be added in the next two years.
The subordinated debt of Rs2 billion will be redeemable by the sponsors within five years. In case, the sponsors fail to meet the MCR within five years, the bank will be required to convert the subordinated debt into common equity.
SBP’s role
The PC chairman and the SBP governor are expected to hold a meeting to sort out the MCR issue, according to PC officials.
The government holds 93.89% stake in SME Bank. The bank has a paid-up capital of Rs2.39 billion against the requirement of Rs6 billion. Its accumulated losses stood at Rs2.5 billion and book value per share was Rs0.91 only in June 2016.
The financial advisers have warned that the MCR shortfall indicates a material uncertainty regarding the bank’s ability to continue as a going concern and the bank may be unable to realise assets and discharge its liabilities.
They have also informed the PC that at the current rate of cash burnout, there is a possibility that the bank’s equity will become negative by the end of this year.
The advisers have also recommended that the Rs4.88 billion legacy portfolio of the SME Bank should not be part of the privatisation transaction. The bank had inherited this portfolio from the defunct Regional Development Finance Corporation and Small Business Finance Corporation.
The bank’s Rs8 billion advances include Rs4.9 billion legacy portfolio. In 2010, the SME Bank had handed over Rs5.5-billion recoveries to NBP. These loans are up to 35 years’ old and chances of recovery are negligible.
Published in The Express Tribune, November 23rd, 2016.