CONSUMER FINANCING BY BANKS

The State Bank circular exempted the lending Banks from the obligation of submitting income tax and wealth tax statements of the borrowers of up to Rs.100,000

From SHAMIM AHMED RIZVI, 
Islamabad

Dec 23 - 29, 2002

The idea of consumer financing which was officially introduced in Pakistan only a few months back is gaining momentum as both the consumers as well as the commercial banks have responded favourably. The break through was made when the State Bank of Pakistan, by a circular issued on July 30, allowed the Commercial Bank to finance consumer durables". This offered a new avenue of investment opportunity for banks and encouraged them to launch imaginative schemes of profitable business. Most of the Commercial Bank have already launched many such schemes. The lead was taken by the National Bank of Pakistan (NBP) with the signing of the memorandum of understanding (MOU) in September last with new Allied Electronics Industries Limited for providing credit facilities to the buyers from Rs.10,000 to Rs.100,000 repayable in 24 months for purchase electronic goods. Speaking on the occasion the then Commerce Minister, Razzak Dawood, who had originally conceived the idea and vigorously persued to give it a practical shape, said that, "my dream has come true". He praised the SBP for their prompt action to unlock the banking system for consumer financing.

Lauding NBP's lead in introducing retail financing, in his speech on the occasion, Abdul Razzak Dawood rightly pointed out that the policy to produce everything within the country had not proved successful enough in so far as the real purpose of industrialisation was concerned. His forthright observation that it would be prudent to open up business avenues for all so that goods on competitive prices are available in the market, job opportunities increase and higher revenue generation takes place, while dilating upon the need of consumer financing which has remained largely ignored, he made pointed reference also to the stagnancy of the consumer base. His idea of the new incentive of consumer credit financing can go a long way in motivating people to use their fixed assets and broaden the consumer base.

Apparently encouraged by the NBP's in imaginative scheme of retail banking, Dawood said that this year he would be targeting assembly/ production of 600,000 TV sets, pointing out that he would want to see a TV set in every house in the next ten years. Needless to point out, the impetus to consumer banking in the country from the TV-financing scheme, as stated by NBP President Ali Raza, can certainly prove instrumental in bypassing banking system, and to ensure its survival from fresh and innovative products.

Under the MoU, NBP will be lending at a minimum Rs.10,000 and at maximum Rs.100,000 for purchasing consumer products, carrying a mark-up rate of about 13 per cent. The financing facility would be for 12 to 24 months. Since there will be no requirement of down payment and no service fees apart from that on documentation, together with acceptance of third party collateral and guarantees it will ensure that all citizens of Pakistan are eligible under the new scheme. As for the other gains accruing from it, mention may also be made of NAELL's Mian Pervez Akhtar's expectation of creation of more than 2000 jobs.

The State Bank circular exempted the lending Banks from the obligation of submitting income tax and wealth tax statements of the borrowers of up to Rs.100,000. The circular has pointed out that the central bank had long been endeavouring to promote consumer financing in the country in view of its linkage with growth of industrial and trading activity. Although while not dilating upon the hindrances in its way, it has ultimately deemed it expedient to allow the banks to provide financing facilities to individuals from the general public for purchase of goods, in a specified range, on hire purchase or installment basis. For eligibility to this facility focuses production machinery, commercial vehicles and consumer durables. It will, however, be noted that although seemingly shrouded in confusion about the actual perception of the beneficiaries, the system now introduced can prove a major breakthrough in consumer financing, the absence of which had proved a stumbling block in the progress in development of commerce and industry conductive to the need of a fast developing economy like Pakistan's.

For consumer financing is basically aimed at creating customers for a wide range of consumer goods largely from middle income groups, handicapped by low enough purchasing power to by the goods produced by a hole range of credit financed industrial units. It is actually the extremely narrow base of consumer support that has compelled many an industrial unit to run below installed capacity, thereby, raising the cost of production. Needless to point out that while working out feasibility of industrial projects, the entrepreneurs are understandably inclined to plan production form installation of machinery and plants to match expected consumer demand over a given period. However, in the haste to do it, in the earlier year with a keen eye on economics of scale, they opted for large enough capacities. But, as in most cases, these estimates proved on the high side in the short-term they had to run below capacity for fear of over-production. Needless to point out that with imaginative planning the demand and supply gap could have been easily filled through the approach of consumer finance.

The potential demand for computers, refrigerators, air-conditioners, T.V sets and other electrical appliances in the middle-income group is on the high side. But actual purchases of these and other similar durable remain on a perceptibly limited scale due to the absence of adequate savings at the disposal of the general public. This limitation on the buying activity should be overcome after the commencement of consumer banking. The collateral against the loan would be the items that are purchased with it. In the even of non-payment of installments by the borrowers on due dates, the banks may attach the mortgaged assets. The banks would have to open new departments with adequate number of employees to carry out marketing services to manage small and medium-term loans.

The banks may also promote consumer banking indirectly by offering loan financing to local manufacturers of different types of durables. The manufacturers may launch their own schemes of hire-purchase against payments in easy installments. In this way, the manufacturers of dealers may directly make loan arrangements with banks against each purchase their goods and thus the responsibility for the recovery of loans may rest with them. The proposed system of consumer buying would definitely activate the trading scenario, which in turn would accelerate the pace or industrial production in specific sectors engaged in the manufacture of a diversified range of durable products.