BANKS NOT KEEN IN CONSUMER FINANCING
SHABBIR H. KAZMI
Jan 24 - 30, 2011
For quite some time experts have been saying that banks are focusing more on investment in government securities rather than extending credit to the private sector. Consumer financing mostly concentrated in auto finance and mortgage seems to be less attractive because of higher interest rate and rising delinquencies. A review of the data about deposits, lending and investments of commercial banks substantiate this perception.
State Bank of Pakistan (SBP) has released the combined balance sheet of all scheduled commercial banks operating in the country for 2010. According to data, total deposits during the year increased by 18.5 per cent to Rs5.12 trillion as compared to Rs4.3 trillion at end 2009. One of the positive points was that during the fourth quarter (4QCY10) deposits surged by 8.7 per cent QoQ compared to a decline of 1.2 per cent during the third quarter (July-September 2010).
In a sharp contrast to the deposit, gross advances also grew but by 6.8 per cent to Rs3.49 trillion as on December 31, 2010 as against Rs3.27 trillion end 2009. Similarly, provisioning grew by 27.2 per cent to Rs339 billion against Rs267 billion recorded at end 2009. The net advances grew by five per cent to Rs3.15 trillion from Rs3.01 trillion during the period.
Due to deteriorating quality of assets, amid alarmingly high non-performing loans, banks preferred to build up their investment portfolio rather than lending money. This is evident from the fact that investments grew by hefty 27.8 per cent to Rs2.1 trillion as compared to Rs1.65 trillion in CY09. Investment to deposit ratio (IDR) surged nearly to 41 per cent from 38 per cent end CY09.
In the recent past, auto financing was considered to be the largest segment of consumer financing. Though the auto sales have started improving bulk of it comes from higher engine capacity 1300cc which is sold on cash and also enjoys premium. According to the data released by Pakistan Automobile Manufacturing Association (PAMA) for December, 2010, passenger cars sales declined by 26 per cent MoM to 6,341 units compared to 8,519 units sold in November. This was mainly due to the year-end phenomenon, where sales normally remain dull. Moreover, coupled with consumers waiting to purchase imported cars after the government allowed imports of five year used cars from three years previously, which is currently in a state of limbo.
Despite disappointing auto sales performance in December 2010, passenger car sales in 6MFY11 is up by 10 per cent year on year (YoY) to 53,163 units compared to 48,344 units sold in the corresponding period last year.
All major auto assemblers have posted healthy growth during the period. Both Indus Motor and Pak Suzuki have witnessed improvements in their market shares from 46 per cent and 31 per cent to 54 per cent and 35 per cent, respectively.
Cars in 1300cc and above category posted highest decline of 44 per cent MoM to 2,424 units mainly attributable to Corolla sales, which dropped by 46 per cent. Corolla accounts for 67 per cent market share in this segment followed by Honda City, which holds approximately 15 per cent of the market. Cars under 800cc category registered a rise of 4.4 per cent MoM due to increase in Mehran sales.
Housing finance has remained the most neglected segment mainly because of limited availability of funds with the specialized financial institutions. Since the average term is extended from five to fifteen years, commercial banks are reluctant in committing funds for longer periods, mainly because of mismatch of maturity. Bulk of the bank deposits are of less than one-year maturity. Though the overall share of housing finance in banksí total lending is still very small, some banking sector experts attribute this to lack of expertise available with the financial institutions to manage the housing finance business.
However, some experts term absence of 'clean title' the biggest hurdle in mortgage finance business. Most of the residential properties are still sold on 'power of attorney', which does not allow the financial institutions to use it as collateral. This situation has emerged because of 1) ban on execution of lease/sub-lease by different authorities and 2) grossly understated value of the asset, mainly to save stamp duty.
Added to this is the violation of building control bylaws. As a result, many of the housing units have been occupied for decades but no completion certificates have been issued.
Pakistan in general and Karachi in particular face acute shortage of housing units. With the passage of time, owning a house/flat has become a dream only for hundreds and thousands of families. The skyrocketing price of residential units is the outcome of announcement of no residential scheme by the government for the last four decades. Since the developers buy land at colossal price, they not only charge a fabulous price for the apartments, violate building bylaws and create pigeonholes. Hardly any project is completed according to the schedule given by the builders.
Builders say the delays are because people booking the flats do not abide by the schedule and delays result in overruns and the ultimate price is far higher than the price agreed at the time of booking. However, clients have an entirely different version to tell. They say builder announces one project after another and the amounts collected for one project is diverted to other projects. Whatever may be the reality, the result is emergence of 'land mafia', which encroach land, construct shabby apartments, and sell them on 'power of attorney'.
Experts have been saying for ages that more specialized housing finance companies should be established. The government of Pakistan should also help these companies in acquiring credit lines from multilateral financial institutions. Unless housing finance rate is brought down to single digit and appropriate foreclosure laws are put in place development of organized housing schemes will not be possible.