July 30 - Aug 5, 20

Due to huge increase in government borrowing, that too at high rate, has left banks no more interested in lending to private sector. Bulk of the deposits is being invested in risk-free government securities. Though, the central bank wants to discourage this practices, rising budget deficit does not allow it to impose any curb on investing in government securities. In fact central bank has been conducting reverse repo to facilitate the banks to lend more to the government.

Lenders have also been taking refuge behind 'rising delinquencies due to higher interest rate'. This is half true and half false. It is true that economic downturn has affected purchasing power but bulk of non-performing loans is the outcome of imprudent lending. While the portfolio was on the rise increasing defaults were not so obvious and pinching. With the shrinking of portfolio and growing defaults banks became more cautious in lending. However, it is on record that auto financing, mortgage financing and even consumer portfolio of Islamic banks are on the rise. This has become possible only because they never indulged in any 'adventurism'. These institutions were often termed 'conservative' but time has proved these 'prudent' lenders.

According to the details made available in Pakistan Economic Survey 2011-12, consumer finance portfolio in the country has been shrinking for the past four years on account of weakening economic conditions, rising cost of credit and rising non-performing loans of the banks. According to the details during nine months of the outgoing fiscal year (FY12) overall size of consumer finance shrank. Auto loans, mortgages, credit cards and personal loans have consistently been on the decline since early 2008. The size of consumer finance reduced to Rs209 billion by March 2012 from its peak of Rs371 billion about four years ago.

According to Ms Ismat Sabir during 2000-07 consumer financing in Pakistan witnessed a boom and the factors responsible included liberal economic policies, free market economy and huge liquidity available to the banks after 9/11. Banks introduced a variety of products such as credit cards, auto loans, housing finance and personal loans, etc. Since it was a new phenomenon in the country, people welcomed it and purchased four wheelers, motorcycles, tractors, busses and vans, home appliances (air conditioners, TV sets, deep freezers, refrigerators etc). This not only gave an unprecedented boost to the local industries but also provided impetus to the allied industries and on top of that new job opportunities were created.

As people enjoyed stable income, personal loans also played important role in popularizing consumer finance, including housing finance. Financing facilities became the blessings in disguise for the middle class, who started utilizing these services for improving its standard of living. Surprisingly, the default rate was quite low. For instance, in the auto financing sector the recovery rate was around 97%, because financial institutions were empowered to foreclose one's property.

Access to, and growth in, consumer finance had social and economic impacts on the economy. This benefited banks as they were able to diversify their credit portfolio. It also saved capital under the Basel II regime, and consumer finance brought much higher returns and stability in earnings. Consumer financing activities started declining in the aftermath of global financial crisis of 2008 but starting 2007 the SBP had already started following tight monetary policy. Banks also became cautious in offering consumer loans and due to the experience of growing of non-performing advances in corporate and SME sectors, financing reduced during FY10.

While many sector experts believe consumer financing to pickup with the recent cut in discount rate some experts have a contradictory opinion. They are of the opinion that the declining trend in consumer financing would not reverse even if there is visible economic turnaround. The factors responsible for the decline in consumer financing over the last some years may disappear but the banks will take many years to clean their slates. Till that time one could only expect financial institutions to follow a cautious approach based on stringent lending criteria.

Some experts have a contrary point of view. They believe that most banks, particularly the big ones, have developed a strong aversion for consumer lending. Yet they are also aware that it will constitute a bigger chunk of profits of the banking industry in the years to come once the economy recovers. The future of commercial banking is in consumer financing that enjoys huge growth potential.

They also say sooner or later banks will have to focus on consumer financing. Market has ample liquidity and little efforts can help in mobilizing more deposits. During FY 12 over US$13 billion or Rs1.2 trillion remittances were received. Focus attempts can help in retaining the money in the banking system. The market ripe for undertaking consumer financing with a new zeal but banks have to be careful in choosing their potential customers.

A review of car sales in the country tells an interesting story, which often raise eyebrows. There has been increase in sale of expensive cars. The question is not how assemblers have managed to increase production of expensive cars but how in the declining purchasing power scenario purchasing power of certain groups has improved. People are going for luxury cars that show a lavish side of the personality rather than a car that plainly commutes. Almost every person even with a median source of income wants to realize the dream of getting his own car. People with 800cc vehicle want to buy 1200cc cars and the ones with 1200cc want expensive vehicles. For those who could not afford a car on full cash payment acquiring one on deferred payment/installments helps in fulfill their dream.

Consumer financing is broadly categorized into various categories. Personal loans include the loans provided to individuals for the payment of goods, services and expenses, and also include running finance and revolving credit.

The credit card business has shrunk significantly. The loans under the credit card had fallen to Rs28 billion from Rs35 billion a year ago. Credit cards were introduced in 1990s when consumer banking was still in its infancy stage. A report by Banking Ombudsman shows that the highest number of complaints pertained to credit card business. The low quality performance of banks in credit card sector was the real hurdle in the promotion of plastic money business.

Housing finance includes loans that are provided to individuals for purchasing or improving a residential house or apartment or land. This category also includes loans for a combination of housing activities such as loans for purchasing of land plus construction.

Auto loans include any loan used to purchase a vehicle. Market survey showed that purchasing of cars on cash has increased mainly due to higher liquidity in agriculture sector as growers got much higher prices for their crops like sugarcane, wheat and rice during the last couple of years.

There are two types of auto loans being offered by the banks, like car leasing and car financing. Mark-up on auto loan is a critical factor for the borrowers. The rate varies according to the tenure and type of the loan. The high mark-up results lead to higher delinquencies.

Credit card and auto loan offers are rising again - though very slowly - after three years of decline. More people are receiving calls and text messages from banks' sales teams offering them new credit cards and auto loans at competitive interest rates.

Credit cards and auto loans were a major source of income for banks before the economic downturn started and forced many of them to temporarily shut down their consumer finance divisions. Many banks - especially smaller ones - have plans of launching consumer finance products. But the banks are still very careful in choosing their potential customers in view of the losses they had suffered in the past due to widespread defaults on credit cards, personal finance and auto loans.

However, it is necessary to point out that most of the borrowers who had defaulted on their credit card, personal finance and auto loans were honest customers who had failed to pay back their loans because of economic downturn. The only regret is that they will not be able to obtain fresh financing from the banks for many years to come because their credit score has been wrecked. Most banks have trimmed their consumer finance sales teams and some have virtually closed down their credit card, personal finance and auto loan divisions to avoid more defaults due to difficult economic conditions.