July 30 - Aug 5, 20

Banks have various functions used to generate profitability through booking of assets. These core functions include Corporate and Investment Banking, Treasury and Retail Banking offering various products and services to meet the clients financial needs. Retail exposure includes an asset based portfolio including personal loans, home loans, auto loans and credit cards. Consumer Banking requires specialized focus since the degree of financial innovation and speed of product development is required consistently to capture the market and introduce products which can give a bank first mover advantage. During recent times, the pace with which consumer banking is growing is under question where banks are increasingly cautious with their lending practice leading through selective advances and multitude of refusals to those who are in dire need for financing. The qualifying criteria to obtain a consumer banking product is more stringent than every before.

Banks have redefined the approval process with greater centralized control given to head office risk teams for approvals or introduction of multiple layers for approvals bifurcated between the head office centralized risk team and the regional offices. Such processes though help manage risk with an aim to focus on quality assets, transaction and time delays for approvals have been disappointing. Consumer loans carry a higher spread compared to corporate loans and is generally driven through booking of clients to ensure that profitability through volumes. With the slowdown experienced in the market, banking and DFI NPLs reached PKR 625.432 Billion as on March 2012, the recovery against these NPLs has only been PKR 14.318 Billion since January 2012. The Net NPL to Loan Ratio is 5.71 percent for all banks and DFIs as on March 2012 which is considered high.

The bankwise consumer portfolio was recorded to PKR 240.764 billion in 3QFY12 compared to PKR 252.210 billion in 3QFY11, a decline of 4.66 percent. NPLs in the consumer sector increased from PKR 44.084 billion in 3QFY11 to PKR 44.824 billion in 3QFY12 consequently increasing the infection ratio from 17.5 percent to 18.6 percent during the same period under review. In order to keep the rising NPLs to the minimum, banks have either completely stopped financing or have commenced with financing however to only those who have the financial stability to not default on the installment. It is also said that under present circumstances, banks would only offer consumer products to those who ideally do not need any financing options since they are self-sufficient with residual cash at their disposal. This indirectly means that banks would only take exposure on those who are financially sound with other factors under consideration mainly, income level, education and family status, repayment capacity, financing need, quality of collateral held and intended use of funds. Those who have a genuine need for financing either would find significant delays in the approval process or an approval based on stringent qualifying criteria at higher mark-up rate currently ranging between 14 percent to 20 percent on home loans, personal loans and automobile leasing.

Banks with current portfolio of credit cards have discouraged release of new cards with qualifying criteria largely dependent on income levels, liabilities, residence and dependents. Even if an individual is eligible, there is a likely possibility that banks will not provide limits on cards as approved in the past when consumer financing was on growth. According to SBP, advances against credit cards was PKR 25.228 Billion in 3QFY11 as compared to PKR 23.143 Billion in 3QFY12, infection ratio increasing from 20.7 percent to 21 percent during the same period under review. Credit cards carry the highest mark-up rate between 34 percent to 42 percent offered by various banks. Banks have made an effort to reduce limits for those with high default rates even cancellation of limits. There have been examples where customers who default on the payments negotiate a settlement deal on accumulated principal and mark-up after which the limits are cancelled upon settlement. Since advances against credit cards are clean, preference is given to those with acceptable income and career profile among other criterias stated earlier.

Advances against mortgage loans reduced from PKR 62.492 billion in 3QFY11 to PKR 56.398 billion with infection ratio increasing from 25.40 percent in 3QFY11 to 29.6 percent in 3QFY12. NPLs during the same period increased from PKR 15.90 billion in 3QFY11 to PKR 16.704 billion in 3QFY12. It is estimated that Pakistan has a shortfall of 9 million housing units considering the population growth expected to increase year on year. It is also estimated that 70 percent of the population either live in slums or rural areas whereas only 30 percent of the population are those who are home owners with registered addresses with local utility companies. With demand exceeding supply, the demand for home loans will continue to be on a rise. What has resulted in the industry in nose dive is high cost of living due to inflation and interest rates which has made paying the mortgage loans a challenge. The recovery for default loans has been slow whereas litigation takes perpetual time before decisions are finalized. Rather than considering eviction and sale of the property which is time consuming and not part of banks core business, banks tend to restructure the loans.

According to Pakistan Automotive Manufacturers Association, passenger car sales increased from 127,944 vehicles as on June 2011 to 157,325 as on June 2012, an increase of 23 percent compared to previous year however, advances for automotive financing has decreased from PKR 53.670 billion in 3QFY11 against PKR 45.722 billion in 3QFY12, infection ratio remaining at 10.5 percent during the period under review. Financing once again is being either done for corporate clients and those who possess minimum liabilities with a healthy income stream. Keeping with high inflation and cost of living, a successful product for banks as compared to other consumer banking products are personal loans which have increased in terms of advances from PKR 110.127 billion in 3QFY11 to PKR 115.370 billion in 3QFY12. Infection ratio in personal loans portfolio for banks increased from 15.6 percent in 3QFY11 to 15.9 percent in 3QFY12. Personal loans are obtained for education, weddings, home improvements, purchase of consumer electronics and vehicles to name a few through the usage maybe numerous. Such mid-size loans assist consumers meet short to mid-term financing needs

Analyzing the past lending practices for consumer banking, the lending has declined since the recessionary impact witnessed in 2008 and not shown signs of recovery based on latest figures highlighted. Banks continue to maintain a hold policy and try to churn as much revenue from the current portfolio rather than increasing the portfolio size. Since advances to Corporate clients follow a similar trend, residual funds are being placed in T-Bills to earn a risk free rate a shift away from the core business of earning thorough lending. During the current year, the outstanding stock level of government securities increased to Rs. 1,660 billion by May 2012. The year-on-year growth in the private sector credit was only 4.2 percent. Since government securities yield a healthy risk free return, banks continue to prefer financing government's deficit through investment in fixed income securities rather than focus more on taking risk and extend private sector credit declining the investment to GDP ratio. Based on current circumstances, it is yet to be seen how banks can shift the strategy towards advances channelized through the retail portfolio.