July 30 - Aug 5, 20

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. 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.

Presently, tight monetary policy of central bank is the most important factor hampering growth of consumer financing in the country. 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.

High interest rates have undermined economic growth. The growth is forecast by the government at 2.5 percent in the current fiscal year, compared with a 9.1 percent estimate for the current fiscal year in India. The IMF has forecast that the country's economy will grow 2.75 percent in 2011, 4 percent in 2012 and 5 percent in 2013. The heavy government borrowing has been a major cause of whooping inflation

The government's heavy reliance on banking system for financing need is the key risk factor in achieving the basic objective of the financial system in the country. The private sector has borne the brunt of required adjustment in the economy and the government has considerably crowded out the private sector both through reduced availability and price of credit. Finance Ministry has asked parliament to enact legislation placing limits on borrowing. Under the legislation, the government will be required to limit borrowing from the central bank to 10 percent of the previous year's revenue.

Analysts fear that if the fiscal deficit goes more than 7 percent it would be disastrous for the country because it would create very high rate of inflation forcing the central bank to further tighten its monetary policy.

The government borrowings from the central bank have deteriorated the currency-to-deposit ratio of the banking system. The government borrowed Rs1280 billion from banks in the fiscal year ended on June 30 as compared to Rs645 billion during the previous year, while it printed Rs1.5 billion daily in new currency notes during the June 1, 2011 and July 25, 2012. The uninterrupted borrowing from central bank and scheduled banks caused an expansionist monetary growth and increased currency in circulation, which has accelerated inflation making it difficult for the economic managers to control the fiscal deficit. The federal government borrowed Rs591 billion from the central bank, Rs548 billion from commercial banks and remaining amount was borrowed from different banking sources, according to the State Bank of Pakistan (SBP).

The frequent money injections by the central bank to settle liquidity issues of the banking system are an indirect borrowing from the central bank, which has the same inflationary effect as borrowing from the central bank. The total amount in new currency printed by the government during the June 1, 2011 and July 25, 2012 was Rs592 billion, according to Finance Ministry. Prior to this, on average the government would print Rs150 to Rs200 billion in new currency notes annually.

Analysts believe that cutting interest rates to single digit level will produce multiple benefits for all economic sectors, as it will lower the cost of doing business, give a strong boost to production activities, provide easy credit and loaning facilities to consumers, promote better investment and exports and generate more tax revenue for the government. The expansion in private sector credit will only increase when the real economic activity gains momentum.

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. Commercial banks' lending to private sector during the Oct-Dec quarter of last fiscal year increased by 4.16 per cent and unlike previous quarters the growth in credit off-take was widely shared by different leading sectors of the economy. 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 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.