Nov 10 - 16, 2008

While consumer financing will more likely to experience slower growth rate during this fiscal year because of limited exposure of banks, consumer banking continues to record consistent progress in expanding its outreach in the emerging financial market of Pakistan.

Reluctance of banks to high credit exposure in consumer market was originally spurred by liquidity squeeze, increasing non performing loans, and number of other disturbing macro economic indicators like non food inflation and monetary tightening which indirectly created slowdown in credit disbursement.

However, financial experts argue that auto loan-considered to be second largest portion of consumer financing-has received slight effect of market contraction due to its asset based financing or hypothecation, which makes this kind of loan secured and, thus, eases recovery of bad debts through impounding vehicles. In Pakistan, steep propensity of price of automobile to revise upward shortly gives an opportunity to lender to auction and reimburse insolvent amount. While no official latest data is available, cross data analysis proves the likelihood of deceleration in growth of credit card, personal, house, and auto loans in the first quarter of fiscal year 09.

Basically, this slow speed started to reveal during last fiscal year when only auto financing dropped two percent on the growth trajectory to 6 percent from an earlier 8 percent. Volatility in interest rates is not discarded as foremost a factor that evokes dull trends in the market. Certainly poor debt obligation remains also one of the crucial driving agents triggering lacklustre mood. To say that stocks in banks or liquidity crunch on propagating list has everything to do with this condition needs to be assessed objectively since rising profitability stands along with operational efficacy of banks and their mounting assets, nonetheless expansion in deposits hits temporary stagnation. More so, it is probably a matter related to shrinking confidence of lenders in the wake of precarious market conditions.

During fiscal year 2007-08, credit disbursement to consumer financing was to the tune of Rs. 359 billion. The volume of aggregate consumer loan exposed a leap jump to Rs. 348 billion in FY07 from Rs. 297 in the preceding financial year. Since credit card proved a fast penetrable mode of consumer financing, customer base underneath continued to enlarge for years. As on end of last fiscal year, total credit card outstanding amount was Rs. 44 billion, which has been soaring since 2005 when the amount was just Rs. 27 billion. Credit risk in this mode of financing is quite high, provoking delinquency in debt servicing. Perhaps, pushed by credit card defaults net non performing loans of only commercial banks reached to Rs. 25 billion at the end of previous financial year.

While net NPL to net loan ratio of all banks and development financial institutions was 1.33 percent, for foreign banks it stayed in negative zone. Bankers evince high interest rate as prerequisite to cope up with administrative cost of credit risk and to generate operational leverage. They say that high mark up on money lent recourses to compensate price of bankruptcy. It is like recovering default loss from genuine payers. Apart from this, extreme variability of interest rate in Pakistan's financial sector is not attracting borrowers to seek formal financial assistance from banks.

Within a short span of time, significant rise in mark up on lending was taken up. For example, weighted average lending rate of 14.42 percent in September, 2008 stood at 11.33 percent in May. Worsened by sporadic discount rate shoot-ups variability on the bases of risk involved in lending and tenure closes interest rate near to spoiling volatility. Rate on auto loan is sometimes as high as 16 percent. It is not that tenure and creditworthiness are not determinants of disbursal, in fact, in many developing emerging financial markets both determines rate of interest. But, there are many such economies that have adequate interest spread and lending rate. For instance, Bangladesh which claims to have fundamentals evaded global financial malfunctions has the lowest lending rate amongst its neighbouring countries: India and Pakistan. It has an average lending rate of 9.7 percent while benchmark prime lending rate in India is 14 percent. On auto loan this is not exceeding over 13 percent.

Then again, consumer banking can still be absolved of financial glitches while spreading its domain over underserved population of the country. In Pakistan bank accounts has hardly crossed 30 million mark-17% of the population-and borrowers 5.5 million. One must take into account rapid saturation of modern financial intermediation processes in the society while verifying potential of consumer banking. At 2005 yearend 7 million transactions were executed through 1,217 auto teller machines, whereas after just three years at FY08 closure multitude of transactions and ATMs recorded 19 billion and 3,121 respectively. During the same period, numbers of online branches increased to 5,282 from 3,265.

Even consumer financing has enormous unexplored market share to capture, which is why, foreign direct investment in financial sector of Pakistan continues to surge despite uncertain situation. There are reports that banks are ignoring unfair practices of staffs making false commitments to lure customers, resorting to unethical modus operandi to recover debts, and indulging into cartelization. As against the SBP prudential regulations for consumer financing, many banks do not keep in correspondence with their borrowers for informing them updates on loan status.

Fair debt collection guidelines recently issued by the State Bank to banks may minimize instances of unfair treatment and not impede banks' bad debts recovery activities. It is worthwhile to note that bullying collection techniques by consumer finance companies pulled up suicide rate graph in Japan to world highest. Interestingly, consumer finance market taxied on contraction line when condition of lowering interest rate to 20 percent was imposed in Japanese financial market. Before it, per annum lending rate happened to be an average 30 percent.

Untamed inflation is leaving full throttled impact over slowdown in consumer financing. The unusual consumer price index is corroding away disposable income of a larger portion of the population. Year on year September food CPI of 29.9 should shatter notion that consumer financing would in short run experience old-days phenomenal growth. However, cut in CRR and SLR and other measures are stabilizing liquidity positions of banks.