Low interest rate giving rise to consumer spending
In the wake of current interest rate prevailing in the country, banks are well-positioned to strengthen their retail banking business, particularly personal loan and auto finance. Analysts believe that low interest rate is giving rise to consumer spending, as theoretically speaking a low interest rate regime will boost consumer spending. Eventually, the banks will pass on the drop in KIBOR (Karachi Interbank Offered Rate). However, banks should remain cognizant of the target market which they are servicing to ensure the development of a sustainable balance sheet and consumer finance business.
Banks are heavily depending on consumer financing and the need of the hour is to facilitate consumers by extending them relief in heavy rates charged by banks. The instrument of interest rate works well to create artificial demand for small and medium engine sized cars as happened during the previous boom. This phenomenon could be a rough proxy for wealth inequality in the country.
As per estimates, the share of 1,300cc and above cars is 49 percent, while the share of 800cc cars is around 30 percent. This shows that the tilt of car industry is towards high income bracket individuals and companies.
According to sources, car sales in Pakistan will be higher in 2017 than they have been in the last few years. With the greatest number of cars being sold in the country within a month, three cars manufacturers contributed to this, namely the Toyota Corolla, the Suzuki and the Honda.
Car financing is also picking up gradually (currently estimated at 30 percent versus 5 percent few years back), thanks to 42-year low interest rates in the country, analysts said.
Currently, auto is one of the industries in Pakistan, while others — ranging from textiles to farm products — are hit hard by stagnating exports. Reduced foreign demand, difficulties related to the international oil price crash and energy shortages are key factors hitting other industries.
The auto industry is now focusing on enlarging output of its cars and export more units to countries in its neighbourhood.
Market survey reveals that the lowest car financing rates by banks have spurred demand for new cars. New companies studying investment prospects include several Europeans such as Renault of France, Volkswagen of Germany and Fiat of Italy. Others have made initial enquiries for starting assembling business in Pakistan. They also see the likelihood of exporting their cars to third countries, besides feeding the domestic market in Pakistan, sources claim.
According to experts, the outlook for consumer finance is positive. Market has matured in terms of availability of credit bureaus, SBP (State Bank of Pakistan) consumer debt servicing caps and caps on loan amounts. Therefore, we do not expect an implosion in consumer financing like we saw during 2006.
Given the prudential framework, the momentum, which is present, will continue to build aiding the banks’ consumer finance books. 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.
Given that interest rates are at a 42-year low, this is an opportune time for mortgage business to grow at a decent pace. Having said that, the SBP report reflects that majority of the growth has been fuelled by auto finance and personal loans where as credit card and housing loan growth has remained relatively flat. We expect this trend to continue, because banks are targeting a very niche segment of consumers for credit cards leading it to become a NFI- (non-funded income) driven business rather than revolving receivables and challenges on mortgage loans are well documented.
Banks, which have an auto finance infrastructure in place will continue to build, whereas the simplicity and quick returns on personal loans should see it being the lead contributor for growth in consumer finance.
Pakistani banks have been focusing more on the consumer finance as it has been increasing since last two fiscal years because of a big lap in auto loans and mortgage finance.
Senior bankers say that the recently announced auto policy can weigh on their business in two ways. They may see a fall in consumer financing because only a friction of people using imported cars seek auto loans but in the longer run when there is a gradual rise in imports of expensive cars and when local auto industry absorbs the policy shock or new auto units come up, banks hope to see a surge in consumer financing.
Auto loans make a large part of consumer financing and since the new policy is meant 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.
Bankers are of the view that they should distribute either housing loans more aggressively or continue to keep the current balance between auto and housing finance because demand for financing purchase of consumer durables and personal loans still remain weak and also credit card business is gathering pace and there, too, banks can exploit more of the potential by being more user-friendly and by further justifying interest rates.
CONSUMER FINANCING STRENGTHENING
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.
On the other hand, business community supports the move of the government to offer a tax amnesty scheme to lure Pakistanis who have stashed money abroad to bring their wealth back, a business leader said.
Wealthy Pakistanis have invested hundreds of billions abroad, which if brought back can change the fate of Pakistan, said Chairman of FPCCI Regional Committee on Industries Atif Ikram Sheikh. He lauded the Finance Minister Ishaq Dar for asking expatriates to invest in infrastructure development in Pakistan to discharge national obligations and get good returns.
Establishing Pakistan Development Fund with the cooperation of Asian Development Bank and offering shares worth 1.3 billion dollars is a laudable move in which Pakistanis should participate whole heartedly, he said.
Atif Ikram Sheikh also supported the decision to create Pakistan Infrastructure Bank in which 60 percent shares and management will be in the hands of the private sector as it will give a boost to the businesses and tackle many problems being faced by the business community. He noted that Pakistanis have invested at least 150 billion dollars in foreign banks and property market which must be lured back to resolve the ongoing problems like dwindling exports, increasing imports and reduced local and foreign investment.
The Tax Reforms Commission has recommended fifteen percent withholding tax on the assets that are brought back to the country which must be reduced to lure funds hidden abroad, he demanded.