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Boom in consumer financing through banks

Pakistani banks have been focusing more on the consumer financing since last two fiscal years. According to State Bank of Pakistan’s (SBP) data net consumer financing of Rs31.2 billion in 2014 and Rs31.3 billion in 2015 had been made by the banks. Till the end of the fiscal year in June 2015, net new housing loans totaled about Rs1 billion against this, net auto loaning, which makes up the bulk of consumer finance, stood close to Rs10 billion.

A rush in housing loans seen during the fiscal year is strong enough to keep up growth trend in overall consumer financing. There was the opinion that there would be a gradual rise in imports of expensive cars. Auto loans make a large part of consumer financing. Since the new policy was for balancing the protection level enjoyed by local assemblers and encouraging cheaper imports and entry of new car makers, it was natural for banks to examine the policy from their business point of view.

In spite of a good growth in housing and auto loans, overall consumer financing in fiscal year 2015 remained weaker than in fiscal year 2014 due to decline in loans for purchase of consumer durables and personal loans made to individuals. At that time it was view that the bankers should distribute either housing loans more aggressively or continue to keep the current balance between auto and housing finance.

Consumer financing via credit cards was also gathering momentum with net financing volumes risen by Rs1 billion each in fiscal year 2014 and fiscal year 2015 and by Rs1.1 billion in the first seven months of fiscal year 2016.

The Federal Investigation Agency detected and closed down some outlets of parallel banking in Karachi and in Punjab. It is well known informal financing cannot be eliminated as long as Pakistan economy remains least documented and banks fail to realize that they need to simplify loaning procedures to attract seekers of personal loans.

Banks’ consumer loans soared more than three times to Rs46.1 billion. This was due to low interest rate stimulated 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. The decline in weighted average lending rates of banks, are flushed with liquidity.

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.

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. Through car sale was marginally lower than 89,824 units sold in the comparable period, yet growing demand of imported used cars captured into 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.

A rising housing units’ shortfall always keeps the home demand high. 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.

Usually, banks charge high interest rates on these categories compared with auto and housing loans.

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.

It should be well known that the declining real interest rates are positive for private demand for bank credit.

The latest data reflects a pickup in bank lending to the private sector. This is the expectations for higher GDP growth in fiscal 2017 and 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 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.

Pakistan’s banking sector increased its loan portfolio by 17 percent during the last fiscal year. This has resulted in the overall credit going as high as Rs15.169 trillion.

Breaking down the consumer loans, house purchase and construction loan volume was at Rs 60 billion. Car loans amounted to Rs150 billion while credit cards and unsecured loans stood at Rs30 billion.

Car financing in particular and consumer loans in general saw signs of resurging after a gap of several years for the first time in 2013-14 on the back of economic growth. In July-September this year, banks’ auto loans almost doubled to Rs11.1 billion from Rs5.7 billion in July-September last year.

In 2016-17, banks’ auto financing totalled Rs70.5billion against that of Rs44 billion in the preceding fiscal year.

An increase in auto loans (and also in overall consumer finance) in the first quarter of the fiscal year is always good as during this period net credit to private sector businesses remains negative due to usual heavy credit retirement.The acceleration in car loans is demand-driven. Bulk of the demand is coming from people employing vehicles in Uber and Careem.

Increasing car deliveries to people associated with Uber and Careem are helping the creation of full-time jobs for some and part-time opportunities for others.

Ongoing rise in car loans in particular and consumer loans in general are helpful in reaching out to new customers. Boom in car financing and modest growth in overall consumer finance is also contributing to the creation of jobs and promoting economic activity.

In addition to auto loans, mortgage loans and loans for consumer durables, credit cards and personal loans are key constituents of consumer finance.

In July-September this year, home construction lending tripled to Rs6.3 billion, from just Rs2 billion in the same period of last year.

Bankers, particularly those associated with Islamic banks or Islamic banking branches of conventional banks, say that in the first quarter of this fiscal year and the last fiscal year, they saw strong demand for housing finance from individual borrowers as well. They also point out that in housing finance (as part of consumer finance) lending for revamping, renovation or reconstruction of housing units is also included.

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