CONSUMER FINANCING

AFFORDABLE MARK UP IMPERATIVE TO GENERATE ECONOMIC ACTIVITY

S.KAMAL HAYDER KAZMI,
Research Analyst
, PAGE
Aug
 24 - 30, 2009

Pakistan has witnessed phenomenal growth of consumer financing products and services over the last seven years. Most of the commercial banks are involved in consumer lending through one or more financing modes, as it has become very lucrative business due to high spread and variable interest rates. The increase in consumer financing has come with many challenges facing the national economy as well as the individual borrowers.

Consumer financing has been helpful in improving the quality of life of the people who have the capacity of servicing the loans. However, there is mounting evidence that this capacity is deteriorating due to high spread and variable interest rates on loans. Depositors are not getting due returns due to high difference between lending and deposit rates. As the consumer financing portfolio is increasing, quality of related banking services is becoming a serious issue. Processing delays, service inefficiencies, unauthorized debits and non-compliance with requirement of providing periodical bank statements are few examples of poor quality of banking services.

CONSUMER FINANCING PORTFOLIO OF BANKS
(DEC 2006 AND JUNE 2007)

YEAR PORTFOLIO CREDIT CARDS AUTO LOANS CONSUMER DURABLES MORTGAGE LOAN OTHER PERSONAL LOANS TOTAL
Dec 2006 Amount (Rs. In Mn) 39,243.1 104,057.2 1,301.5 49,245.4 131,324.2 325,171.4
No. of Borrowers 1,207,885 253,097 59,082 24,313 1,310,371 2,689,736
June 2007 Amount (Rs. In Mn) 44,460.5 107,575.7 1,003.6 58,052.2 143,286.0 354,378.1
No. of Borrowers 1,615,569 265,876 55,139 24,007 1,383,847 3,211,117
Source: State Bank of Pakistan (Communication with CRCP, November 16, 2007)

GROWTH IN CONSUMER FINANCING

GROWTH IN CONSUMER FINANCING (% )

PORTFOLIO JULY 2007 JAN 2008
Mortgage Loans 15.5 17.6
Credit Cards 19.2 6.9
Auto Finance 8.0 6.0
Personal Loans 7.9 3.0
All 10.4 6.6
Source: SBP Second Quarterly Report for FY08

According to SBP, the consumer loans witnessed an increase of Rs.72.4 bn or 29% and reached Rs.325 bn during 2006, whereas until June 2007 it further increased to Rs. 354.4 bn. The share of consumer loans in the overall loans increased to 14.3% until June 2007 from 9.4% in 2004.

Category-wise analysis of consumer financing in rupee terms reveals that personal loans carried the highest share i.e. 40.4% followed by 30.36% of auto loans, 16.39% of mortgage loans and 12.55% of credit cards. However, in growth terms, the credit card category and mortgage loans witnessed highest growth. The number of borrowers has also increased significantly. It is estimated that the number of ATM and credit card users are increasing in excess of 50% every year.

According to the SBP, the total NPLs of the commercial banks rose to Rs.151.9 bn in June 2007 from Rs.142.8 bn in March 2007. A considerable proportion of the NPLs are related to the consumer financing products of the commercial banks. The statistics reveal that growth in consumer loans slowed down to 6.6% during first seven months of fiscal year 2008 from 10.4% in the preceding year. The growth has declined in all categories of consumer loans, except mortgage loans.

REGULATORY FRAMEWORK

The regulatory framework for consumer financing comprises SBP regulations, orders, policy directives, and its institutions mandated to deal with various aspects of credit banking, Banking Ombudsman, and newly created Consumer Protection Department (CPD) etc. The regulations prescribe minimum standards for consumer financing activities, impose exposure limits on banks, and provide an overall direction for provision of consumer financing services while leaving a lot of policy space to discretion of the banks.

The mechanism for redress of consumer grievances related to credit cards, ATM, personal loans, housing finance and auto loans comprises of both administrative and judicial institutions.

HIGH INTEREST RATE SPREAD

In recent years, the spread has exceeded 7% on the average. The high difference between lending and deposit rates indicates that the depositors are not getting due returns, as compared to huge profits being earned by the banks. Indeed, the lending rates have increased and deposit rates have decreased over the last few years.

ISSUES AND CHALLENGES

The consumers as well as the banks are entitled to certain financial rights, which must be protected in an institutional-cum-legal framework, which is capable to strike a balance between rights of both entities independently. The dilemma in Pakistan is that the consumers remain a weaker party vis--vis the banking sector, thus balancing the equation in favor of the latter. The market-oriented vision of economic managers has served the banks more favorably than the consumers. The banking sector has demonstrated capacity to influence the policies, procedures and rules in its favour, as it is better equipped with financial resources, knowledge, technology, and lobbying with the governance machinery. This leverage is leading to emergence of a whole range of problems and grievances, especially in relation to consumer financing, thus negatively affecting the ability of consumers to articulate and protect their financial rights and access justice if these rights are violated by the banks.

CONCLUSION

In Pakistan, the consumer financing has significantly contributed to economic turnaround by stimulating consumption and investments. There has been a phenomenal increase in private consumptions due to easy availability of credit from banks. Further, the volume of consumer complaints is rising day by day due to processing delays, service inefficiencies, hidden charges, and poor disclosure practices.