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Banks’s renewed focus on consumer finance amid shrinking spreads

Consumer financing has seen a surge in the last two fiscal years primarily due to a big jump in auto loans and to some extent in mortgage finance. Consumer finance serves as the source of financial stability and uplifts the economic and social status of the household. At the macroeconomic level, consumer financing has significantly contributed to economic turnaround by stimulating consumption and investments. There has been a phenomenal increase in private consumptions due to easy availability of credit from banks. Low interest rate spread is an important indicator of the efficiency and competition in the financial systems and helps in economic growth through increased investments.

In recent times, banks have little excuse now to let consumer finance slip or grow timidly because economic growth is expected to pick up pace, mega housing projects are coming up and urbanization and public craze for better lifestyle is creating demand for consumer finance. For most banks, selling consumer finance products in emerging markets seemed like more trouble than it’s worth. In these markets, incomes are low, transactions are small, and relatively few people use banking services of any kind. In reality, the opportunity to create profitable consumer-finance businesses in emerging markets is much more attractive than it appears. But to take advantage of that opportunity, banks and other financial services institutions must develop new business models and find ways to team up with new partners.

Consumer financing in Pakistan is broadly categorized into four types of products: Personal Loans, Auto Loans, Housing Finance and Credit Cards. Overall consumer financing in FY16 remained weaker than in FY15 due to decline in loans for purchase of consumer durables and personal loans made to individuals. Auto loans make a large part of consumer financing and since the new policy is aimed at balancing the protection level enjoyed by local assemblers and encouraging cheaper imports and entry of new car makers, it is but natural for banks to examine this policy from their business point of view. Besides, restoration of peace and order in Karachi is encouraging real estate developers to offer new housing schemes for different categories of middle income groups. A surge in housing loans seen during this fiscal year is strong enough to keep up growth trend in overall consumer financing even if auto loans face a weaker demand in near future. Consumer financing via credit cards is also gathering momentum with net financing volumes having risen by Rs1 billion each in FY14 and FY15 and by Rs1.1 billion in the first seven months of FY16.

With lowest interest rates in 43 years, banks are well-positioned to strengthen their retail banking business as the stage is set for a consumption-driven economy, which will benefit the bank’s consumer finance books. It needs to be noted that the market has matured in terms of availability of credit bureaus, SBP (State Bank of Pakistan) consumer debt servicing caps and caps on loan amounts.Furthermore, banks will continue to leverage on technology and consumer servicing to increase their pie for market share which, in parallel, will be aided by initiatives being undertaken by SBP to increase the inclusion of consumers in the financial system. 

The increase in consumer financing has come with many challenges facing the national economy as well as the individual borrowers. As the consumer-financing portfolio is increasing, quality of related banking services is becoming a serious issue. Processing delays, service inefficiencies, unauthorized debits and non-compliance with requirement of providing monthly bank statements are few examples of poor quality of banking services. Other issues such as non-transparent advertisements, violation of agreed terms and conditions, levy of unjustifiable charges, and arduous complaint redress mechanism, etc. also reflect upon the poor quality of consumer services.

The issue of consumer education is equally important. Most of the bank users do not have enough understanding of the very basic rules and terms and conditions. Another problem is that the documents prepared by banks are usually technical and the information, which may affect financial rights of the consumers, is never stated clearly and plainly in these documents. Indeed, scheduled banks have excluded consumers as a legitimate stakeholder in formulation of, or any change in policies and procedures. There is a need to focus on public awareness about the financial rights of the citizens, and the forums available to them for accessing justice, if these rights are violated.

The problems in interest rate spread and service delivery notwithstanding, consumers have benefited a lot from the consumer-financing sector. A large number of people have been able to meet their real needs by accessing credit from the banks. Therefore, steps need to be taken for sustainability of this sector. This requires the banks to develop data based lending strategies to manage the risks associated with this sector.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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