Consumer financing products include credit cards, personal loans, auto loans and housing mortgage. It not only contributes towards facilitating the life patterns of consumers, but it also proves to be a source of improvement for the image of banks. Unfortunately, there is a widespread violation of consumer rights in Pakistan. The area of consumer protection has remained neglected in the country. It is pathetic that majority of consumers are unaware of their rights, hence they are vulnerable to exploitation by producers. A consumer has misleading information and because of the ignorance of his rights and non-availability of redress mechanism, he/she is exploited by the producers. The government is responsible for protecting the consumer welfare and rights through intervention.
A consumer is vital to any economic plan, strategy, policy and activity. The consumers may suffer if they have no information or imperfect information in the world of highly competitive markets. The completion gives consumers plenty of choices. Hence, the issue is misinformation or imperfect information of the consumers, who must be educated. In the given situation of ostensibly competitive market, a consumer protection policy is direly needed in Pakistan. The policy must address the need to lay down quality standards to provide specifications for goods and services to be provided in a country.
Consumer financing has emerged out as one of most prolific aspects of banking in Pakistan. Banking sector witnessed unprecedented growth after 2001 due to low interest rate and product innovation in consumer financing. A need is, however, felt to strengthen the regulatory mechanism for strengthening the consumer financing sector in the country.
The experts have identified the key issues hitting the growth of consumer financing in the country. These issues include the high interest rate, high inflationary impact, unsolicited financing, deteriorating quality of services, lack of consumer education, poor information disclosure practices, intimidating recovery practices, loosing competitiveness in international trade, and weaknesses in regulatory framework.
The tight monetary policy of central bank has been the most important factor hampering growth of consumer financing in the country. Last month, the State Bank of Pakistan (SBP) increased the key interest rate by 25 basis points to 6% in a clear indication that inflation was picking up pace. The central bank jacked up the interest rate after maintaining the status quo for 20 months. The rate had stood at a four-decade low of 5.75% since May 2016. It was in double digits at 10% in the first half of fiscal year 2012-13 before inflationary pressures started easing. The central bank’s tight monetary policy has made the money more costly for the businesses, which ultimately turn into defaults.
Critics say that the government by raising interest rates is creating hurdles in the growth of business environment in the country. Banks generally find it easy to lend money to large corporate sector, while the medium and small size business entities have been paying much higher interest on borrowing. The private sector has been a victim of government’s borrowing from the banking system, which deprived the private sector of using the funds for growth of the economy.
The central bank’s tight monetary policy is one of the key reasons behind the private sector’s falling demand for credit. The increased interest rate has made doing business increasingly expensive. In the last financial year, the private sector credit off-take from the schedule banks showed negative growth amid slowdown in the domestic economic activity.
A challenging economic and business environment continues to affect the growth of banking industry in Pakistan. Deteriorating asset quality and high interest rates are likely to continue to hold back credit growth over the coming months. The non-performing loans (NPLs) have presently reached all time high. Surge in the NPLs pose a challenge for the banking industry in the country. The NPLs of the banking industry witnessed a rapid increase since calendar year 2007. The NPLs compel the banks to adopt cautious approach towards advancing of loans.
The consumers’ awareness on banking terms and conditions, policy, rules and regulations is a critical factor in securing financial rights. For example, the State Bank of Pakistan has amended certain provisions of Prudential Regulations for Consumer Financing. Under the revised Regulation, banks/DFIs shall ensure that overall credit card and personal loan limits, both on secured as well as on unsecured basis, availed by one person from all banks/DFIs in aggregate should not exceed Rs 5,000,000/-, at any point in time, subject to the condition that the overall unsecured/clean facilities on account of credit card and personal loan of that individual do not exceed Rs 2,000,000/-.
The central bank has also amended Regulation R-3 by adding a new provision which states, “Banks/DFIs may waive the requirement of 50% debt burden in case a credit card and personal loan is properly secured through liquid assets with minimum 30% margin.”
It is the direction of the State Bank of Pakistan (SBP) for the banks, development finance institutions (DFIs) and micro-finance banks (MFBs) to develop and implement their own framework on fair treatment of the consumers. The central bank has underlined the financial consumer protection, its significance, global developments and bank’s own expected role vis-a-vis the financial consumer protection. The SBP has already issued several market conduct instructions for banks in its endeavor to foster financial consumer protection across the industry, but it has been noticed that financial consumer protection is perceived to be limited to complaint handling only. For dissemination of the real connotation of financial consumer protection, the State Bank had to issue the directive entailing the meaning of financial consumer protection and the conduct expected from banks and DFIs for the advocacy of financial consumer protection.
No country can grow economically without ensuring protection of consumer’s rights with emergence of competitive environment in markets of goods and service. The companies of different sectors should ensure consumers’ rights keeping in mind that these people are their business partners whose contribution are vital in development and growth of their businesses. Without protecting consumers’ rights, the country cannot allure foreign investment, which leads to bring competition in different fields of business and benefits to layman in terms of high quality in the products and services against reasonable prices and charges.