Recovery becoming a problem


Oct 29 - Nov 04, 2007

As was feared by experts the demand for consumer financing could not maintain its growth momentum during the current year. As a matter of fact it declined if compared to an increase of over 27 percent in 2006.

According to some experts rising interest rates, spiraling service charges and deterioration in quality of service are bringing down demand for consumer loans, credit cards and auto leasing. Other believes this fall in demand was inevitable and could have been anticipated. The rush of consumers to buy household goods and automobiles was bound to decline as most of the intending buyers who could afford to pay the instatements might have availed the facility. The remaining might have been discouraged by the rising interest rates & service charges. In any case the inflow of customer could not remain that high, market experts believe.

The unprecedented phenomenal growth of consumer banking over the past five years had opened new opportunities for banks and the business particularly in automobile, electronic goods and housing. But the growth in consumer banking is now facing new challenges as a result of interest hikes.

Consumer financing picked up rapidly as interest rates plunged to record lows in 2000 and 2001. Cheap credit was also used for speculative trading in stock exchange, commodities and in real estate. The consumer financing also contributed to inflationary pressures, resulting, from 2005 onwards, in a tight monetary policy by the State Bank, pushing up the interest rates. This has made loans repayment expensive. The central and commercial bankers are apparently trapped in a difficult situation, with consumers unable to service debts.

In the last five years, consumer banking raised the numbers of borrowers of half a million rupees and less up to more than 425,000. The amount of small loans too increased by more than 100 percent from Rs.154 billion at end of December 2001. Now, the state Bank of Pakistan reports a drop in consumer loans. But what it does not report are the problems in recovery of the stuck up amounts.

A joint assessment report of Pakistan's banking sector by the World Bank and the International Monetary Fund (IMF) about a year ago noted the share of personal loans (particularly, auto loans, house loans and credit cards) has grown from virtually nothing in mid 1990s to 12 percent of total bank credit in September 2003. "The rapid consumer credit growth, if sustained, could lead to deterioration in banks' loans portfolio", the report had warned. Bankers now find it difficult to recover Rs.10 billion stuck up against 15,000 cars", confided a senior banker.

Credit card business too has its own problems. Banks have been blamed of charging penalties for late payment while card holders claim that it was made within stipulated time. The card issuers do not accept the liability of misuse of a card after it has been lost. They continue to hold the card holder responsible for all transactions till a lost report is lodged. The merchants are more interested in pushing up the sales and do not bother to match the signature of their customer with that on the card. So, the ultimate victim is the card holder whose card is lost and the same is misused by some other person.

As the number of complaints of misuse of cards increased, the Ombudsman recommended the State Bank to instruct banks to issue PIN based credit cards that would provide additional security. This recommendation should be implemented by the year 2008", Azhar Hameed, the Bankers Ombudsman said. The Bankers, Ombudsman detected parallel banking accounts in the banks. The unscrupulous staff maintains two set of books. It uses one set for its business and depositors' money is not credited to bank but in the personal business books. The amount is then transferred to top books of the banks at regular intervals after using depositors' money for the business.

In the last 9 months of 2007, disbursement of consumer loans fell 42 percent to Rs.38.8 billion, from Rs.67.2 billion in a year ago period. This fall is responsible, in part, for an overall decline in private sector credit. There are many reasons for a sharp decline in consumer loans. The number one is a rise in interest rates. Weighted average lending rate rose to 11.29 percent in March 2007 from 10.40 percent in June 2006. Accordingly, the effective interest rates on consumer loans shot up, thus reducing the demand for these loans.

Besides, many people in middle-income groups could not service their car loans or other personal loans. This shook confidence of others around them to seek consumers loans. In less privileged localities, people who had got cars on bank loans transferred the lease documents to others after they failed to service high priced loans. Thus, fresh demand for auto loans was met but the volume of loans and the number of borrowers remained intact. During FY 2007, disbursement of auto loans declined to Rs.7.6 billion-or about one third of the Rs.23.2 billion loans distributed in July-March FY 2006.

Apart from high interest rates and low demand for local and imported automobiles, increased prices of domestic cars and higher insurance charges also led to decline in demand of consumer credit. In addition, the slowdown in consumer loans in consumer loans in July-March FY 07 was a natural reveals of very high growth in these loans in the same period of last two fiscal years. In July-March FY 05, consumer loans had grown 70 percent and in July March FY 06 they still grew 32 percent. Another reason for a fall in the consumer loan is that from 2006., banks began to set borrowing limits for their client after netting their aggregate take home income by the total financing availed from other banks.