RISE IN LENDING RATE NOT TO AFFECT CONSUMER-FINANCING BUSINESS

It may, however, start experiencing a slump after a few months because of market saturation

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Aug 07 - 13, 2006

According to experts engaged in consumer financing business, the recent permission of the State Bank to increase the lending rate by half percent is not likely to adversely affect the so far flourishing business in this sector. It may, however, start experiencing a slump after a few months because of market saturation. The rush of customers to buy household goods and automobiles may decline after a few months as most of the intending buyers who can afford to pay the installments might have availed the facility by that time. The inflow of the customers may not remain that high, market experts believe.

The first part of the view is also supported by the past experience. As the State Bank of Pakistan decided to follow a policy of gradual increase in interest rate, the general impression was that car sales would go down. However, the data shows that car sales have been on the rise despite hike in interest rates during the last year. This is another side of the story that one of the basic objectives of the central bank's decision (allowing an increase in the lending rate) to ensure an enhanced return to the depositors never materialized. Most probably the latest increase in lending sales will also not benefit the depositors who would again be left purely at the merry of the commercial banks.

The consumer finance mainly comprises auto financing, home loans and credit cards. During the last 3-4 years overall consumer financing swelled by about 25 percent annually. In view of the vast potential many leasing companies and Modarabas also entered the field along with commercial banks. So far the delinquency rates in consumer financing business is negligible. But during the last few months default cases have shown rising trend, making everybody alert. Banks and leasing companies, during July 2006, alone, have seized about 150 motorcars for default in payments. That perhaps provides substance to the fear of experts regarding market saturation.

Anyhow so far the leasing business has not witnessed any slow down. During the last year Askari Leasing Limited, a subsidiary of Army Welfare Trust, has retained its position as the second largest leasing company of Pakistan. Askari disbursed Rs. 3.6 billion during the financial year 2004-05 against Rs. 2.7 billion in the last year showing an increase of about 33.3 percent as compared to previous year.

Askari Leasing Limited (ALL) was incorporated in August 1993 with an authorized share capital of Rs. 500 million and is listed on all three stock exchanges of the country. The company has generated enough resources to adequately finance its leasing operations, mainly by securing funds through Certificate of Investment, which is reflective of the confidence the COI holders repose in the company's management and its business potential. The company's operations are based on sound appraisal criteria and standards and are focused on quality lease business. Major areas of financing include consumer auto leasing and big ticket leasing to large local and multinational companies. Askar, the auto lease package, has firmly placed the company in auto finance market. Funds have been deployed in a well-diversified lease portfolio and the company is successfully playing its role in the growth of national economy.

A spokesman of Askari Leasing told this correspondent that the year 2004-05 was characterized by difficult environment for the leasing industry on the face of the existing low interest rate regimes, lack of credit appetite in the corporate sector and very aggressive posturing by the large commercial banks in the consumer financing and auto sector. In this difficult business environment, the management of the company embarked upon the strategies to counter the unfavourable trends. The company entered into marketing alliances with vehicle manufacturers to ensure prompt delivery to customers of small cars. This had the desired positive effect on the brand name, "Askar". Asklife, Askari Leasing's product in leasing of consumer durable products to customers has won wide recognition. The situation has improved during the current year.

During the year, to improve company's service and delivery; Gujranwala SBO was upgraded to a full branch status. "The branch is already making healthy contribution in building up our SME portfolio in Gujranwala region. Faisalabad branch was shifted to bigger premises to better serve the expanded business. Management is confident of favourable impact on disbursement as well as profitability during the year to follow".

The lease income for the year under review decreased by 0.86% as compared to its corresponding period. The cause of this variation was the gradual declining trend of the interest rates in the country; accordingly the company had to concede and offer new business volumes at prevailing market competitive rates. "However, our financial charges also decreased by 11.2% evidencing the ability of the company to generate low cost funds, thereby well absorbing the impact of loss due to falling rates on our assets". To seek a sustainable growth level, ultimately switching it to maximization of shareholders wealth, the company thrived in disbursing Rs. 3.6 billion in auto finance, corporate, and SMEs sector and consumable durables, against Rs. 2.7 billion in the comparable period, registering an increase of 33.3% as compared to previous year.

The company has been able to maintain the pretax profit level of Rs. 126 million that is only 9.6% less than its corresponding period. An important factor to be noted, however, is the favourable net profit ratio, compared to the corresponding period. Last year, the company realized a signified amount of capital gain of Rs. 56.2 million (Rs. 3.8 million), which came out of the pure treasury transactions. It, therefore, needs to be appreciated that the net interest income derived through the spread between interest income and interest expanse improved by 47% over the period under review, signifying improvement in core earnings. In this very competitive environment in which the cost leaders, i.e. the commercial banks have been more or less dictating the market, this achievement is an appreciable feat. With some increase in the lending rate during the current financial year, the company is hoping for an improved profitability.