Consumer finance enjoys enormous growth potential



July 26 - Aug 01, 2004





With the rising interest rates and inflation some of the analysts are getting little sceptical about the outlook for consumer financing in the country. As opposed to them, many analysts are of the view that overflowing liquidity and constant increase in bank deposits are encouraging the commercial banks to come up with more innovative products. Banks are focusing more on consumer finance and their strategy is fully complemented by the companies marketing consumer durable.

Now, an individual can acquire from a mobile phone to an expensive automobile on monthly installments if he/she can convince the lender about regular income and repayment ability. Banks also offer personal loans and housing finance. Consumers are being bombarded by promotional campaigns, each advertiser claiming its offer 'The Best Bargain'. One may wonder, what has changed or why the financial institutions have become so obliging?

According to a cynic, "Financial institutions are not the victim of 'love for clients'. Offering all these schemes has become a Majburi (compulsion) as they are sitting on tonnes of money. Very few borrowers know that the rate of interest being charged on consumer finance by the financial institutions is too high as compared to prime interest rate. The average interest rate being charged for financing consumer durable is around 10% per annum as opposed to less than 2% yield on the T-Bills. The average interest rate for rolling over credit on a credit card is around 2.5% per month. Besides, there are many hidden costs about which the borrowers are often kept in dark." This may be an extreme point of view but it is also a fact that the average rates being charged on consumer finance are relatively higher.

According to another analyst, "The quantum of disbursement of loans and interest rates are directly dependent on demand and supply. However, it is a fact that the average rates being charged from an individual is relatively higher as compared to the rate being charged from a corporate. This disparity is due to lack of 'profile' of individual borrowers. A financial institution can get a CIB report of a corporate in a few seconds but assessing the creditworthiness of an individual is very difficult. Besides, average borrowing of an individual is small but a lot of time and effort have to be spent on documentation etc. Therefore, there are valid reasons for charging higher interest rates from individual borrowers."

Dilating his point he said, "Less than five years ago financial institutions were operating in 'sellers' market'. Demand for funds was far higher than the supply. As opposed to this, now financial institutions are sitting on tonnes of money but number of quality borrowers is still small. Besides, historically financial institutions in Pakistan have been dealing with corporate clients and, therefore, lacking in expertise to handle consumer financing. They are learning fast 'tricks of the trade' but changing the mindset is taking slightly longer time."

According to a banker, "Our society suffers from an obsession, people display their affluence by spending cash. One of the motives behind spending cash is to avoid documentation. Therefore, it may not be wrong to say that only the salaried class is interested in acquiring consumer durables on deferred payment. It also suits the financial institutions because acquiring 'profile' of a salaried person posses no problem the details can always be obtained from the employer. The employers are more than willing to pass on the burden of extending loans to employees to the financial institutions. The employers also often take the responsibility of repayment of rentals/installments."

According to third quarterly report of State Bank of Pakistan (SBP), the growth in banking sector deposits has surged strongly since FY03, which appears to be principally due to a corresponding exceptional rise in external account surplus. The narrowing external account surplus during Jan-May 2004 would have suggested a slowdown in deposit growth.

However, the rise in deposit appears to have been insulated by: 1) the re-intermediation of NSS investments; 2) the record growth in credit off-take (for the third quarter of a financial year); and 3) rising incomes due to increasing economic activities.

Net disbursement to the private sector increased significantly, particularly in third quarter of FY04, on account of the growing trade volume and strong credit demand for personal credit. As a result, overall credit of the banking sector increased by Rs 19.5 billion during third quarter FY04, bringing the cumulative July-May expansion to Rs 224 billion. Viewing the figures for commercial banks only, overall credit increased by Rs 78.2 billion during Jan-May 2004, which is significantly higher than the increase witnessed during corresponding period last year.

The sectoral composition of the increase in consumer credit has changed significantly during third quarter of FY04 as compared to second quarter of FY04. During second quarter most of the consumer credit was directed to finance automobile purchases. In contrast, during third quarter, the unclassified sector (which mainly constitutes the personal finance and balance transfer facilities) registered the largest expansion.

Auto loans, nonetheless saw an increase, rising by Rs 5.4 billion during third quarter of FY04 as against Rs 5.3 billion increase in third quarter of FY03. In addition, mortgage loans showed the highest expansion for the last three quarters, probably reflecting the aggressive marketing of these loans and launch of new schemes by some of the large domestic banks, enjoying greater outreach.



(As on March 31, 2004)
In percentage terms





Credit cards




Auto loans




Consumer durables




Mortgage loans












Source: SBP Third Quarterly Report

Bank wise data for consumer credit shows that the big five banks contributed 32.6% of the total consumer credit, with one bank accounting for 20% of total consumer credit. In fact, this bank has been aggressively marketing its 'personal loan' product over the last few quarters, which is reflected in the 41% share of this bank in total 'other' loans of the banking sector.

Foreign banks account for 30.8% of outstanding consumer credit as on March 31, 2004, of which only two banks held 78.5%. These two banks appear to be particularly strong in credit card business; enjoying 55% share in this market segment. Foreign banks are also competing aggressively in personal and mortgage loans market.

However, it is domestic banks (excluding big five banks) that have captured the major share of the consumer credit market especially in auto finance, mortgage loans and loans for the purchase of consumer durables. This is the outcome of their faster shift in market strategy to take advantage of rising liquidity within the banking system.

According to an analyst, "The reason for the larger market share of some of the banks in consumer finance is the result of their effort to build profile of individuals. First they marketed their credit cards and then went for consumer finance. Their initial clients were the corporate employees, enjoying substantial regular income. They also successfully linked extension of most of the consumer finance to credit cards. Most of the domestic banks are also extending the facility to the existing credit card holders."

One of the examples is 'AASAN Installment' scheme of Standard Chartered Bank. The initial purchase is against the credit limit of credit card, which is subsequently transferred to easy installment plan. The biggest advantage is that the purchaser does not require any credit approval and can simply buy the products against his/her credit limit. This plan is marketed regularly through co-branding, i.e. the promotional brochures containing brand names of different products. This provides an opportunity to a cardholder to select a product as well as repayment plan to suit his/her need. It may not be out of context to mention two other schemes being offered by the Bank to its credit cardholders. These are Iqra (Education Financing) and Insurance Cover.

According to an analyst, "Leasing companies were initially focusing big corporates. With the growing competition, without corresponding increase in pie size, they have to look for high net worth individuals. One of their strongest niche markets has been auto financing. However, with the entry of commercial banks in auto financing business they have to explore new options. In the past bulk of the automobile was under financial lease but now operating lease is also getting popular. One of the reasons for tremendous increase in automobile sale is the auto financing. Saying this one should not ignore that now an individual can acquire any product and settle his liability through monthly instalments. The most interesting part is that financial institutions are able to generate repeat sales. With the passage of time more and more products are being offered under deferred payment plans. For example PICIC underwrites medical equipment leases."

It is important to mention that delinquent loans were common in the past but financial institutions do not face a similar situation in consumer finance. According to an analyst, "The default percentage is low mainly because financial institutional are very particular in credit approval. Therefore, they are able to contain 'habitual' default and also the circumstantial default. On top of this they are also particular about recovery. Most of them have 'out sourced' recovery. Since these recovery firms are owned and managed by 'powerful' and politically well connected people acquiring an asset does not pose any problem for them."

A common complaint is that these recovery firms intimidate and also re-posses the asset forcefully. However, the management of such firms say, "Most of the time we are given the mandate when it becomes almost impossible for the financial institutions to recover the outstanding payments or re-posses the asset. Initially, we also try to convince the delinquent to settle the liability but once it becomes evident that the person does not wish to settle the liability we have no option but to re-posses the asset forcefully. However, these are rare incidents because most of the time the issue is resolved amicably."

According to an analyst, "There are two types of defaulters, habitual and circumstantial. A deeper probe shows that bulk of the default falls pertains to habitual defaulters. Historically, financial institutions were not only less prudent but were making least efforts to re-posses the assets. One of the key reasons was said to be 'inadequate legal cover'. However, it was a lame excuse because there were laws but will was missing. Now these laws have been amended and financial institutions are also under pressure to contain delinquent portfolio. On top of all these the recovery firms are doing a good job."



It is a two-way traffic and both the lender and borrower have to realize their rights and obligations. Financial institutions are in the business of lending and cannot afford delinquent loans. Similarly, people desirous of improving their lifestyle wish to continue accumulating new assets. Therefore the best practice to follow is 'you keep me happy and I will keep you happy'. According to a banker, "My advice to every individual is that assume only that much liability you can afford to settle without causing problem for you or the lender. Don't hurry and accumulate assets slowly and gradually. If you face any problem discuss it with the lender. We are here to facilitate and not to create problems."

It is often said that most of the individuals cannot take advantage of consumer finance and it is only for the 'elites'. A financial expert says, "This is totally wrong perception. All the financial institutions are in the lending business; it may be another thing that at time they give more attention to a 'bigger' client. This is mainly because they follow an old saying 'a bird in hand is better than two in the bush'. My advice is, please do your homework properly. Before moving a proposal look at your income, cost of the product and repayment plan. The rule of thumb is, monthly installment should not be more than one-third of take home salary/income. There should also be adequate proof of income. Unless income can be ascertained no financial institution would be willing to extend any credit."

He continued his advice by saying, "Build your profile with the banks. Funds inflow and outflow should be routed through banks. Also acquire a credit card make purchases but don't default on payment. You may not need a credit card but it certainly helps in building the profile. You can buy durables against credit card limit and transfer it to easy installment plan. But please remember that you have to settle all the liabilities to remain in 'good books'. Once you are in good books more and more credit will follow you."


Keeping in mind the total population of Pakistan and improving per capita income, it may not be wrong to say that consumer finance enjoys enormous growth potential. It provides an opportunity to own and use an asset without making the full payment. Buying assets on deferred payment also allows retaining cash for investing in revenue generating ventures. Most probably if one manages his/her finances prudently the earnings can be far higher than the interest being paid on deferred payments.

However, one of the problems is that there is an acute shortage of qualified financial advisors. In most of the developed countries people 'trade on equity'. This helps in generating more income as well as building more income generating assets. Keeping in view that country suffers from low savings rate, it is imperative that financial institutions should create an incentive for saying, ensuring modest return on deposits/investments. Saying that it is also important that people should also look beyond keeping their money in bank deposits.



As stated in the opening there are clear indications that interest rates are on the rise in the country and it may have some negative impact on consumer finance. Though, there has been some increase but financial institutions have not passed this to borrowers. However, it is yet to be seen how the central bank reacts. One thing is clear that the central bank will tighten its monetary policy to contain rise in inflation rate. It is necessary to point out that private credit expansion is not the real cause of inflation. It is commodity financing, which has proliferated hoarding and must be curbed.

Saying this, it is also necessary to reiterate that interest rates being charged on consumer financing are still very high and must be brought down to realistic levels. It is also important to point out that that there are some hidden costs. The central bank must take note of the practice to stop the financial institutions from fleecing the clients. It may be true that all the financial institutions are not indulging in such practices but those who indulge must be stopped.

In most of the developed countries and a large number of developing countries there are 'Consumer Protection Societies' who work as watchdogs. It is a piety that Pakistan does not have such entities, which allow the scrupulous elements exploitation of consumers. It is the consumers who have to resist all types of exploitation, be higher prices or discrimination. Unfair treatment of consumers is the worst type of Human Rights violation and must be stopped immediately.

Borrowers must also note that days of 'free lunch' are over. If they borrow they also have to settle the liability in time and in full. They should also abstain from assuming a liability, which they cannot pay off. There may be too many temptations but do not fall pray and must learn to live within means. It is good to be ambitious but there could be serious implications of being over-ambitious.

Last but not the least, the country is following deregulation policy where the role of regulators is diminishing with each passing day. Financial institutions may have the right to determine their own policies but they should not be allowed to exploit the clients. All the policies should be aimed at facilitating the clients and not maximizing the profit. Pakistan Banks Association and associations of NBFCs should also come up with self-regulatory mechanism. It may be true that the country needs strong financial institutions but it is also imperative that rights of the clients should also be protected. The survival and growth of financial institutions is linked with the prosperity of clients.