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Innovative consumer financing still a challenging subject

Despite improved economic indicators in the country, consumer finance is still a challenging subject, both for the consumer and the banks. Pakistani banks opt to secure their finances before opening up doors of consumer financing. Short-term advances are always better for banks than long-term as they are less risky for the bank and easier for the customer to pay back, said a senior banker talking to this scribe, last week.

Most of the banks are using traditional approach of documentation and putting in maximum safeguards before going to auto, home or any other financing. As against developed world, innovation is missing as far as consumer finance in Pakistan is concerned.

Analysts believe that income disparity in recent times has made it necessary for a consumer to be aware of the benefits and demerits of taking loan financing and managing the risk. Financial institutions are readily offering loans to customers in order to refurbish their asset base and build income. The customer needs to be well-informed and well-equipped to review choices before making any decision. He must evaluate potential risks of taking loan financing.

Before an agreement on financing, we need to be clear, both as lender and borrower, about the fundamental elements involved in the process. Each lending decision almost always carries a risk. Customers either take a loan or an overdraft facility. A main thing to note is that interest is charged on the full amount in case of a loan, while interest in the case of an overdraft is charged on the outstanding amount only.

A banker told PAGE that banks today need collateral – additional security to protect them during loan financing. Tangible security like land, property and car needs to be documented in case of loans exceeding over a certain ceiling, usually for commercial or business purpose, to build, construct or renovate. A number of customers do not know that clarity of documentation is the main factor in getting a loan. The longer the association between the banker and borrower the greater the chances for a loan to be approved.

Always maintain a bank account with one bank consistently to build potential credit history he insisted. On the other hand, aggressive marketing campaigns launched by the banks are targeting the consumers and repeatedly encouraging them to purchase a loan or credit card. In some cases, the banks have gone to an extent where a consumer who has not even applied for a loan, is informed through telephonic call that the bank has approved a loan for him.

Consumer finance in 2016 picked up on strong demand for auto loans and loans for purchase of property, house building and renovation. And demand for personal loans was also high during last year, bankers say adding that the trend still continues. The overall consumer lending of banks grew more than 100 percent to Rs70bn at end-December 2016 from Rs29bn at end-December 2015, sources said.

Data shows banks’ consumer loans soared more than three times to Rs46.1 billion in the first half the current fiscal year as decades-low interest rate piqued people interest in low-cost funds to own automobiles and houses. Consumer loans rose exactly 365 percent to Rs9.9 billion released.

Analysts said banks are witnessing a considerable rise in demand for personal loans and other secured credit, signaling that the economy is gaining momentum. “The decline in weighted average lending rates of banks, which are flush with liquidity,” a banker said. “Improvement in standards of living of households is pushing up consumer loans portfolio.”

Analysts, however, believed that auto financing must have been the real catalyst. Home loans would play second fiddle to it. Quarterly trends, they said, showed that auto and house credit had major shares in the total consumer loans of Rs7.8 billion in July-September 2016/17.

A total of 85,901 new cars were sold during the first half of 2016/17. Through car sale was marginally lower than 89,824 units sold in the comparable period, yet growing demand of imported used cars ate into the new car market share.

Analysts said auto financing has been on the rise since the last few years and its share in consumer loans is increasing as well. Likewise, a massive housing units’ shortfall always keeps the home demand high. With declining interest rate, people are tapping into the low-cost banking money.

Analysts said credit cards and loans for consumer durables, however, must have attracted less number of borrowers. Usually, banks charge high interest rates on these categories compared with auto and housing loans.

The World Bank increased its growth forecast for Pakistan to 5.2 percent for fiscal year 2017, 0.7 percent up from its earlier projection, while International Monetary Fund projected the GDP growth at five percent for FY17, which is a positive sign.

The year 2016 was a very good year for small and medium enterprises due to a surge in bank lending. A similar trend was witnessed in corporate loans. The pace of consumer loans’ growth also more than doubled last year, but agricultural lending remained flat on net basis grew 29.2 percent in CY16 against just 6 percent in CY15.

According to the recent SBP report on banking performance. “This is very promising. And since we see this coming along with a 47pc annual growth in private sector company’s credit and strong consumer lending it is can be reflection of higher economic growth,” sources said.

Another encouraging credit distribution development in CY16 is that 21 percent of corporate loans — up from 19 percent in FY15 — was in fixed assets during this period loans to SMEs for fixed assets fell from 33 to 18 percent.

Sources in financial; institutions claim that private sector companies, taking advantage of low interest rates, also kept retiring their old bank debts and regularized their NPLs. This also was a key factor behind higher corporate lending in the last year. Corporate loan infection ratio came down from 12.3 percent in FY15 to 10.6 percent in FY16.

Pakistan’s weak economic indicators are a consequence of policy making that deal with symptoms and not fundamental issues. This is stated in the six-month economic review issued by the Institute for Policy Reforms. The report says that sudden rise in the current account deficit is serious. “At 2.6% of GDP it has breached already the year’s target of 1.5% of GDP.” Pakistan’s exports as a ratio of GDP are at a historic low. This ratio was in double digits in 2000-10. It is now about 5%.

Pakistan has had higher current account deficits before. But they were financed by grant aid or FDI. In other cases, we had to go for IMF arrangements.

Public investment is important to increase economic productivity and to crowd in private investment. The federal government debt has increased. Though increase is lower than last year, it has enhanced GoP’s burden. Total increase in public and private external debt and liabilities was over US $1 billion for the half year.

The national economy requires some positive news to put the wheel of national economy. If exports are increased, investment both local and foreign increased and people get jobs through rapid industrialization, then fruits of economic reforms would start bearing results and it would give boost to consumer financing under different heads.

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