Jan 24 - 30, 20

Consumer financing is a kind of service designed to provide individuals with the necessary finance to make personal purchases ranging from buying a car to a house. It is classified into different types of products. Personal loans are provided for the payment of goods, services and expenses and comprise running finance and revolving credit to individuals.

Any financing allowed to individuals for meeting their personal, family or household needs is called consumer financing. The concept of consumer financing is based on the need for an institutional arrangement that provides consumers with financing support to enhance their consumption and, as a result, improve standards of living.

Until the 1990s, many commercial banks of the country were not providing consumer finance services to their clients. Credit facilities were accessible to selective white-collar workers for paying their bills while travelling abroad. The excessive liquidity accumulated by banks due to high inflows of remittances in the aftermath of 9/11 and low interest rates in the year 2001 led to numerous commercial banks providing consumer finances.

According to the State Bank of Pakistan (SBP) report, consumer loans witnessed an increase of Rs72.4 billion or 29 per cent and reached Rs325 billion during 2006. In addition, till June 2007 loans further surged to Rs354.4 billion. Category-wise consumer financing reveals that personal loans constitute 40 per cent followed by 30 per cent auto loans, 16 per cent mortgage loans and 13 per cent credit cards. At the end of 2007, the percentage of consumer financing loans reached above 15 per cent of the total advances of all banks.

During this period, consumer financing brought new luck to banks as lending rates of consumer financing were the highest. Despite lower outflows of advances to textiles and other major sectors of the economy, commercial banks were able to boost their earnings mainly due to the increasingly dominant role of consumer financing.

After the remarkable performance of consumer financing over the past five years, consumer financing plunged by Rs50 billion or 17 per cent to Rs224 billion at the end of June 2010, as compared to Rs294 billion a year ago i.e. 2009.

Every area of consumer financing marked a decline during 2009-10. Credit card loans had fallen to Rs28 billion from Rs35 billion last year. The financially lucrative credit card business, which has gained utmost significance in developed economies, failed to get substantial space in the domestic market. A bleak performance of the business was considered to be the major factor hindering its progress.

Outstanding loans for automobile sector declined by Rs64 billion by the end of June 2010 as against Rs78 billion a year earlier and Rs105 billion at the end of June 2008. Personal loans exhibited an abnormal decline. The stock of personal loans reduced to Rs94 billion in 2009-10 as against Rs420 billion in 2008-09 and Rs499 million in 2007-08.

Sources in the banking industry told PAGE that banks were cautious about consumer financing after facing defaults on credit cards, personal finance and auto loans.

Unlike past, the banks are going to be very cautious this time around while selling cars and clean (unsecured) facilities to the people in view of their experience.

Most banks have trimmed their consumer finance sales teams during the last one year while some went on to close down their credit card, personal finance and auto loan divisions to avoid more defaults due to difficult economic conditions that pushed up price inflation and borrowing costs.

The loans advanced on account of consumer finance dropped to Rs233 billion in November 2010 from Rs294 billion in June 2009. The size of auto financing came down to Rs59 billion from Rs78 billion while credit card loans fell to Rs26 billion from Rs36 billion during the same period. Net personal loan advances also fell to Rs92 billion from Rs116 billion as home finance dipped to Rs52 billion from Rs61 billion.

Experts believe that high interest rate and inflation and weakening economic conditions are hitting hard to consumer financing. The economic conditions are too harsh making it impossible for people to afford costly credit cards and auto loans.

According to them, low quality performance of banks in case of credit card is the real hurdle in promotion of plastic money business. The car purchasing was the second highest attraction for the consumers, but the outstanding loans in this particular sector showed steep fall during the last couple of years. Despite fall in loans for car purchasing, the prices of cars went up.