SHY BANKS WARY BORROWERS
GOVERNMENT KEEPS ON BORROWING TO MEET BUDGET DEFICIT
SHABBIR H. KAZMI
Sep 24 - 30, 2012
Though, financial institutions are reluctant to accept that many of them have virtually stopped extending auto finance facility to individual clients, it is a fact. In fact some of the institutions have virtually closed down 'consumer finance departments'. Whatever, skeleton may be there is only to cater to the needs of corporate clients of the employees of blue chip companies. For many of these borrowers buying a car at full cash payment is not a problem but financing facility is used to retain cash or use it for any other more productive purpose. Since these transactions of part of overall financing arrangements often the interest rate charged is lower than the rate charged from individual borrowers.
According to reliable sources many of the leading commercial banks have totally suspended/stopped auto financing to the consumers in a bid to minimize risk of default amid high interest rates, reduced demand in and increase in number of defaulters on the auto loans. However, the full-fledged Islamic banks and some of the leasing companies are offering auto financing facilities but with extremely cautious approach. It is worth noting that Islamic banking windows of some of the commercial banks are offering 'Car Ijara' due to lower overhead charges. Some critics say that financing rates charged by Islamic banks are relatively higher but 'niche market' is willing to pay the premium.
Interestingly, one sees divergent trends in auto sales. Pak Suzuki Motor Company saw its sales going down marginally despite increase in the sale of Mehran (up 40% YoY) and Cultus (up 21% YoY). Though, discontinuation of Alto was partly compensated by an increase in sale of Mehran, a 35%YoY decline in sale of Ravi cumulatively inched down sales by 4% YoY.
Sale of Indus Motor Company remained also most flat at 3,092 units. Corolla, the revenue driver for the Company declined to 2,800 units in August'12 as compared to 3,681 units during August'11, whereas Hilux contrastingly had its sales up by 31% YoY. The phasing out of Cuore has dented Company's volumetric growth to some extent as it now relies heavily on its high-end segment products.
Outlook of auto financing is dependent on cost of vehicles, availability of funds with the banks and interest rate. Since exchange rate is dependent on Pakistan's liquid foreign exchange reserves, the recent news about current account turning surplus is positive news. However, it is only because of receipt under CSF, not a very reliable source. Higher oil price will keep imports high and energy crisis will keep the exports low.
A closer look at the recent auction of Treasury Bills indicates that the banks have ample liquidity. State Bank of Pakistan accepted bids worth of Rs283 billion out of the total received bids of about Rs462 billion and cut-off rates also witnessed a slight decline. According to Alfalah Securities, the cut-off yield on 3 and 6 month papers reduced to 10.2293% and 10.2446% respectively, while the 12-month T-Bill cut-off yields dropped to 10.2574%.
Receipt of US$1.18 billion Coalition Support Funds (CSF) propelled August Current Account balance into a surplus of US$1.24 billion, resulting in a surplus of US$919 million in 2MFY13 against a deficit of US$261 million for in the same period last year. In addition, there have been emergent positives on the trade deficit (goods) which has contracted to US$1.06 billion in August largely due to an 8%MoM decline in imports.
While the strong CA surplus strengthens the case for further monetary easing, it is likely to show slippages over the months particularly if foreign inflows do not materialize as expected. In this regard, sticky international oil prices pose a key risk. Nevertheless, a full-year CA deficit of US$4 billion would still represent an improvement of 11%YoY while upside risks emanate from potential uptick in textile exports on strong Chinese cotton yarn demand. However, the risks to the Balance of Payments position remain in view of 1) IMF repayments of US$1.7 billion in 2HFY13, 2) delays in release of further CSF flows, 3) global oil prices and 4) non-materialization of targeted receipts (3G license fees, Etisalat payment). Upcoming IMF-Pakistan talks (both technical & policy level) are the next key checkpoint for Pakistan's macroeconomic outlook.
Considering CPI remains in single-digits, the exchange rate parity remain has stable and that the cumulative FY13 CA balance should stay in surplus over the next few months, the SBP is likely to continue lowering of discount rate. Beyond the immediate-term however, SBP's hitherto dovish stance could reverse by mid-CY13, particularly if potential forex reserve erosion amidst speculative pressures on the currency warrant a return to an IMF program.
However, there is need to change the attitude of the policy planners as well as bankers. Policy planners and tax collectors suffer from complacency. Instead of focusing on achieving higher GDP growth, efforts are made to squeeze the existing tax payers. In fact the efforts should be made to accelerate GDP growth rate as well as creation of new job opportunities. When people get more money they will spend more, which in turn will help in the collection of higher taxes.
On top of this to meet the budget deficit government keeps on borrowing, This on one hand causes higher inflation and on the other hand leave little amounts to be lent to private sector. At present financial institutions have invested huge amounts in Treasury Bills, Pakistan Investment Bonds and even the terms finance certificates issued to lessen the quantum of circular debt. Some analysts have been saying a long time that sickness of energy sector is being transferred to financial sector.
It is a welcome sign that banks have become serious in containing non-performing loans. Many of the bank defaulters can be termed 'circumstantial defaulters'. However, it is also true that in the past banks have also indulged in reckless lending. This may be because of growing political pressures on the banks to lend more money to the favorites.