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Low interest rates boost consumer finance business in Pakistan

Today banks are well-positioned to strengthen their retail banking business; particularly personal loan and auto finance low interest rates. Low interest has given rise to consumer spending. The stage is now set for a consumption-driven economy. The outlook for consumer finance is positive.

The momentum is there and the growth trend will continue in a stable manner. 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.

The momentum, which is present, will continue to build aiding the banks’ consumer finance. Banks will continue to leverage on technology and consumer servicing to increase their pie for market share. This will be aided by initiatives being undertaken by SBP to increase the inclusion of consumers in the financial system.

Considering interest rates are low, this is the best time for mortgage business to grow at a decent pace. Majority of the growth has been fuelled by auto finance and personal loans.

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.

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 over Rs9.9 billion released under the same portfolio in the corresponding period of the last fiscal year, according to the State Bank of Pakistan (SBP).

Banks are witnessing a considerable rise in demand for personal loans and other secured credit, signaling that the economy is gaining momentum. Improvement in standards of living of households is pushing up consumer loans portfolio.

The State Bank of Pakistan, in its fresh two-month monetary policy announcement, kept the key interest unchanged at 5.75 percent, at least four-decade low.

The central bank aimed at driving economic growth further in a muted inflationary scenario.

It is believed that auto financing must have been the real catalyst. Home loans would play second fiddle to it.

Quarterly trends 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. Though car sale was marginally lower than 89,824 units sold in the comparable period, yet growing demand of imported used cars consumed the new car market share.

Auto financing has been on the rise since the last few years and its share in consumer loans is increasing as well. With declining interest rate, people are tapping into the low-cost banking money. Credit cards and loans for consumer durables, however, must have attracted less number of borrowers.

Low interest rates have come into play as far as consumer and corporate lending is concerned.

The SBP’s figures showed that bank credit to private sector rose to Rs296.4 billion between July 1, 2016 and January 13, 2017 compared with Rs231.1 billion in the corresponding period of the previous year.

The latest data, reflecting a pickup in bank lending to the private sector, is in line with expectations for higher GDP growth in fiscal year 2017 as well as the strength of domestic demand in the Pakistani economy.

The State Bank projected the growth rate between five to six percent for the current fiscal year in line with the finance ministry’s target of 5.7 percent.

The growth rate was recorded at 4.7 percent. This is the highest rate in the past eight years for the last fiscal year of 2015-16.

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 fiscal year 2017.

The digital economy is growing at 10 percent a year, more than triple the rate of overall global economic growth while the on-line spending scaling up consumer finance in Pakistan.

The interest rate is at 4 decades low which was expected to have a booming effect on consumer finance, car and home financing. It however could gain the momentum 2005 when there was a mad rush in demand of private loans for different segments in the economy like home finance or car financing.

The State Bank of Pakistan (SBP) expects a substantial increase in credit demand from private sector borrowers.

The State Bank said businesses likely to borrow more money in upcoming quarters than they did a year earlier as growth in manufacturing sector, better energy supplies, CPEC-related activities and soft monetary stance signaling continued growth in the economy.

The government reliance for budgetary borrowing from the central bank may also induce commercial banks to go for alternative investment avenue of corporate lending.

The Monetary Policy Committee of the State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 5.75 percent.

It said the inflation expectations in the current fiscal year continue to remain well anchored. This has been largely due to the near-absence of any major supply side pressures.

Rising real incomes in a low interest rate environment since Fiscal Year (FY) 14 are indicating signs of pick up in domestic demand, which is broadly reflected in the core inflation measures.

The SBP statement added, improving consumer confidence, as depicted by IBA-SBP Consumer Confidence Survey of March 2017, indicates further increase in consumer demand.

The real economic activity continues to gather pace at the back of better agricultural output, increase in key Large-scale Manufacturing sectors, and a healthy uptick in the credit to private sector.

This expansion is helped by a range of factors including low cost of inputs, upbeat economic sentiments, improved energy supplies, and CPEC related investments. As a result, GDP growth is expected to further improve in fiscal year 2017.

The prudent monetary policy stance has translated well into low and stable market interest rates, which incentivized private sector to borrow from commercial banks to finance their businesses and investment activities.

Consumer financing continued the uptrend in the first eight months of the current fiscal year. Improved interbank liquidity conditions also spurred the growth in private sector credit.

This was led by both net government retirement to commercial banks and a decent increase in bank deposits compared to the withdrawals seen last year.

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