ANALYSIS OF CONSUMER FINANCING REGULATIONS IN PAKISTAN
SYED ALAMDAR ALI
Hailey College of Banking and Finance Lahore
Oct 29 - Nov 04, 2007
Consumer finance in the most basic sense of the words refers to any kind of lending to consumers. In financial services industry, the term "consumer finance" often refers to a particular type of , sub prime lending (that is lending to people with less than perfect credit). This branch of the financial services industry has become more extensive in Pakistan over the last few years. During 2006, consumer loans witnessed an increase of Rs 72.4 billion or 29 percent and touched Rs 325 billion mark, and on the back of persistent higher growth, the share of consumer finance in overall loans had increased to 13.5 percent in 2006 from 9.4 percent in 2004. A reputed economist Kaiser Bangali has rightly criticized the monetary authorities for encouraging consumer financing at the cost of the poor. According to him "Consumer financing has led to higher circulation of money and relaxed the income constraint of middle-income class, bringing the once-luxury food items to their tables." Simultaneously with the passage of time a significant portion of such financing is becoming non-performing that is also adding pressure on the financial institutions to improve their controls in this segment. Keeping in view the sensitivity of the situation, the State Bank of Pakistan (SBP), and the Securities and Exchange Commission of Pakistan has righteously promulgated the improved Prudential Regulations (PR's) separately for Banking Companies, FI's and Non-Banking Finance Companies (NBFC's) respectively. These PR's not only lay down a much improved criteria for making provisions against performing and non performing secured and unsecured consumer finances but also relate the consumer credit creation ability to the non-performing portfolio of the particular institutions. Consequently consumer financing has slowed down during the first half of the 2007 calendar year, as it grew only by nine percent during January-June. Here is a brief account of Consumer Financing in Pakistan:
CREDIT CARDS: According to the PR's for Consumer Financing issued by SBP Credit Cards mean cards which allow a customer to make payments on credit. Maximum unsecured limit under credit card to a borrower generally does not exceed Rs 500,000/= which also includes the limit assigned on any supplementary credit card. Banks / DFIs however, sometimes assign a clean limit beyond Rs 500,000 but not in excess of Rs 2 million to their prime customers who have extraordinary strong repayment capacity, moderate debt burden and a clean track record. Whereas for NBFC's this limit is Rs.1 million. The similar limits can also be allowed to other customers within the extended limits subject to the condition that excess amount is appropriately secured within the meaning of relevant regulations. The loan secured against liquid securities shall, however, be exempted from the above limit. The un-collateralised credit card loans have been increased to Rs 42.822 billion in H1 CY07 from Rs 33.538 billion in H1 CY06.
PERSONAL LOANS: According to the PR's for Consumer Financing issued by SBP Personal Loans means the loans to individuals for the payment of goods, services and expenses and include Running Finance / Revolving Credit to individuals. The clean limit per person for personal loans generally do not exceed Rs.500, 000/-. Banking companies, FI's and NBFCs however, assign a clean limit beyond Rs.500,000 but not in excess of Rs.1 million to their prime customers who have extraordinary strong repayment capacity, moderate debt burden and a clean track record. Banks/DFI's and NBFCs may also allow financing under Personal Loans in excess of Rs.500, 000 to other customers as well, provided the loan is appropriately secured by any tangible security. The loans secured against liquid securities are, however, exempted from this limit. The Personal Loans have been increased to Rs. 142.373 Billion in H1 CY 07 from Rs. 120.517 Billion in H1 CY06.
AUTO LOANS: According to the PR's for Consumer Financing issued by SBP Auto Loans mean the loans to purchase the vehicle for personal use. The Banking Companies provide Auto Financing to their individual customers. The maximum tenure of the auto loan finance do not exceed seven years. While allowing auto loans, the banks / DFIs ensure that the minimum down payment does not fall below 10% of the value of vehicle. Further, banks / DFIs extend auto loans only for the ex-factory tax paid price fixed by the car manufacturers. In other words, banks / DFIs cannot finance the premium charged by the dealers and / or investors. In addition to any other security arrangement on the discretion of the banks/ DFIs, the vehicles financed by the banks / DFIs shall be properly secured by way of hypothecation. The banks / DFIs shall ensure that the vehicle remains properly insured at all times during the tenure of the loan. The rules for NBFC's regarding accommodating the customer for the purchase of automobile further state that the NBFC shall not fix the period of lease for less than three years in the case of any finance lease agreement, except in case of computers and other equipment used in information technology or consumer leasing. Neither the PR's issued by SBP nor the PR's issued by SECP prescribe the maximum period of leasing for NBFC's. The Auto Loans have been increased to Rs. 105.444 Billion in H1 CY 07 from Rs. 97.777 Billion in H1 CY06.
HOUSING FINANCE: According to the PR's for Consumer Financing issued by SBP means loan provided to individuals for the purchase of residential house / apartment / land. The loans availed for the purpose of making improvements in house / apartment / land also fall under this category. Banks / DFIs determine the housing finance limit, in accordance with their policies. At the same time, while determining the credit worthiness and repayment capacity of the prospective borrower, banks / DFIs ensure that the total monthly amortization payments of consumer loans, inclusive of housing loan, should not exceed 50% of the net disposable income of the prospective borrower. Banks / DFIs and FI's do not allow housing finance purely for the purchase of land / plots; rather, such financing would be extended for the purchase of land / plot and construction on it or the construction on a plot already purchased by the customer. Accordingly, the sanctioned loan limit, assessed on the basis of repayment capacity of the borrower, value of land / plot and cost of construction on it etc., should be disbursed in trenches, i.e. up to a maximum of 50% of the loan limit can be disbursed for the purchase of land/ plot, and the remaining amount be disbursed for construction there-upon. The housing finance facility is provided at a maximum debt-equity ratio of 85:15 for a period not exceeding 20 years.
A NBFC can make the Consumer Housing finance services on the following conditions:
(a) Provide long term finance for the purpose of constructing, purchasing or making any additions, alterations or improvement to or in any property;
(b) Lease and rent on hire purchase basis buildings for residential and commercial purposes;
(c) Make loans and advances for house building or non-residential properties to individuals, corporate, projects and housing companies;
(d) financing against existing property by way of mortgage, provided that the same property shall not be accepted as security unless the facility extended is settled; and
The Housing Finance has been increased to Rs. 54.672 Billion in H1 CY 07 from Rs. 43.205 Billion in H1 CY06.