INTEREST RATES AND AUTO FINANCING
SHABBIR H. KAZMI
Mar 30 - Apr 05, 2009
Hopes of reduction in interest rates have once again marred by hike in Treasury Bills yield at the latest auction. The central bank mopped up Rs 81 billion against a pre auction target of Rs 70 billion and total bids received of Rs 118 billion. The central bank mobilized Rs 52 billion in 12-month paper alone at weighted average of 11.8475% against total bids of more than Rs 78 billion.
The bids pattern once again exhibited that the banking system was suffering from excessive liquidity. It was also evident that the banks were keen in locking funds for longer duration, anticipating reduction in discount rate at forthcoming monetary policy statement announcement for Aril-June 2009 quarter.
While it is anticipated that the central bank would cut the discount rate by up to 250 basis points at the time of announcement of policy statement, the reduction is being opposed by the proponents of higher interest rates as a tool to curb inflation. However, some of the experts are of the view that lending rates have already come down due to Kibor hovering around 12.5% as against the discount rate of 15%. They also go to the extent of saying that this downward drift in Kibor also suggest that keeping discount rate at 15% has become of no consequence because of massive reduction in private sector credit offtake. In their opinion willingness of the banks to lock more and more funds in T-Bills also confirms this trend.
Some of the banking sector experts are of the view that drying up of private sector credit demand is worrisome. In fact effort should be made to boost credit demand to trigger GDP growth. The time has come to boost demand to facilitate hike in supply. As such price of various commodities have come down substantially but demand has not grown because of massive reduction in purchasing power of masses. However, with the recent decline in commodities prices, purchasing power of masses is likely to improve.
The economic slowdown in the country is infecting loan portfolio of banks. One on hand fresh disbursement has declined and on the other hand percentage of delinquent credits is on the rise. As a result provisioning against non-performing loans is getting fatter with the passage of time.
Worst has been the case in case of consumer finance. Housing finance segment has always remained low in Pakistan mainly because of mismatch of maturity of deposits and lending. While bulk of the deposits are of less than one year tenor, minimum tenor of any housing finance is above ten years. Therefore, commercial banks have always been shy and less interested in extending loans under this head.
Till recently financial institutions were extending huge auto loans. However, with the hike in interest rate as well as car prices and fuel cost becoming unbearable sale of cars has reduced to half. On top of this defaults are also on the rise forcing the financial institutions to review credit appraisal policy. This was not enough and some of the institutions started following corrosive recovery techniques. All these factors forced to potential borrowers to defer purchase of new cars through auto finance.
Worst hit are the transporters or operators of commercial fleets. As such there was no auto finance facility for public transport i.e. taxis, light commercial vans, buses and trucks. Buying of these vehicles on cash has been a big issue and transporters had to rely on informal lending mafia operating in the country. The first attempt to finance public transport came as 'Yellow Cab' and recently through leasing. However, both the schemes became nightmare for the financial institutions.
It may not be wrong to say that the State Bank is responsible for creating unhealthy competition among the banks and the leasing companies. Around the world commercial banks are required to create subsidiaries for undertaking leasing business. However, despite various representations made by the leasing companies, the tilt of central bank has remained towards the commercial banks and it has not been mandatory for them to establish subsidiaries for undertaking leasing business. The commercial banks enjoy the undue advantage of low cost funds and greater outreach as compared to leasing companies.
The central banks must come up with a public transport financing scheme in consultation with leasing and insurance companies. Over the year condition of public transport has become pathetically low and has been the cause of increase in number of motorcycles and cars running on the roads. This not only causes traffic jams but also increase use of CNG, petrol and LPG. Introduction of long chasses buses, capable of carrying more than 100 passengers at a time help in containing number of private cars and motorcycles plying on the roads, ease traffic jams and saving on precious foreign exchange.
For long time the government has been talking about introduction on CNG buses in the country. The time has come to implement this project. The key stakeholders in this business are assemblers of buses, gas distribution companies, financial institutions, insurance companies and entrepreneurs having experience of managing public transport system. Like lending to agriculture sector, the central bank should make it mandatory for banks to allocate amount equivalent to 2% of their deposits for financing of public transport.
To further facilitate the central bank should also ask the commercial banks to extend credit lines to the investment banks to for financing ethanol production facilities. As it is becoming evident that oil producing countries are keen in keeping crude oil prices above US$50 per barrel use of ethanol should be made mandatory in Pakistan.