July 30 - Aug 5, 2012
Personal Loans have become a part of life for millions of Pakistanis. It plays a very important role in the day-to-day life of households. Typically they pursue loans for personal requirements such as purchase of car, renovation and/or purchase of house, education of their children, marriage of their daughters and meeting urgent medical expenses etc. Pakistan has witnessed phenomenal growth of consumer financing products and services over the last decade. 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 main players in this sector include commercial banks, DFIs, leasing companies and Modarabas. The increase in consumer financing has come with many challenges facing the national economy as well as the individual borrowers.
Consumer loan history is relatively new, about 10 years and includes schemes such as auto loan, credit cards, house loans, and personal running finance by the loaning firms and by some institutions. Over the last ten years, Pakistan's banking sector has substantially promoted the consumer financing by unleashing a wide range of products such as credit cards, auto loans, personal loans etc. This unprecedented growth of consumer financing is largely attributed due to the economic policy liberalization attuned to the principles of free market economy, and an availability of huge liquidity to the banks in the aftermath of 9/11. In the Pakistani banking sector, however, the evolution of the consumer loan portfolio is more of a recent phenomenon, as banks have traditionally focused on lending to the corporate sector and public sector entities. While few prominent foreign banks took the lead in introducing credit cards during mid 90s, their accomplishment was limited to the top tier of salaried customers and businessmen.
People purchased vehicles like car, motorcycles, tractors, busses and vans, home appliances such as air conditioners, TV sets, deep freezers, fridges etc on credit cards and small loans. This situation not only gave an unprecedented boost to the industries of these products but related industries also flourished, besides creating job opportunities.
The consumer finance is quite labor-intensive activity and demand for this product has resulted to employ more people, both on full time and part time, it also benefited banks from the diversification of their credit portfolio. It also saved capital under the Basel II regime, and consumer finance has brought much higher returns and stability in earnings. However, every segment of consumer financing from credit card to car purchasing in Pakistan has witnessed a sharp contraction during the last few fiscal years.
All segments under the head of consumer financing, instead of showing growth, indicated a steep fall. Even credit cards business, which had been a success story in most of the countries where these cards were introduced, were seen losing ground in Pakistan. The booming business of car purchasing through bank loans also fell sharply during the last couple of years.
As per the latest Economy Survy of Pakistan, there is a net decline in consumer financing during July - March 2012 stood at Rs8.5 billion as compared to the decline of Rs 17.4 billion in the comparable period of 2010-11, thereby registered a decline of 3.9 percent as compared to the decline of 7.1 percent during the period under review. Auto loans, mortgages, credit cards and personal loans have consistently been on the decline since January 2008 on account of multiple factors (e.g. fragile economic conditions, rising cost of credit and increasing default). The stock of consumer finance reduced to Rs. 209.1billion in March 2012 from its peak of Rs. 371.3 billion exactly four years earlier. Each category within the consumer finance segment has registered a persistent increase in the loan infection ratio for the last three years. This increase has been a combination of rising NPLs and declining credit to each category with the exception of consumer durables.
Consumer finance in Pakistan is also facing certain challenges which are as follows;
Pakistan has one of the highest interest rate spread in the world. As per an analysis, the average spread is over 7 per cent. This indicates that average deposit rates have been very low, as compared to average lending rates. In Pakistan, almost all consumer loans are on the basis of variable mark up rates. It is attributed to two reasons; first variable rates are in the larger interest of banks due to high probabilities of increase in rates in the future; second, a long term debt market has yet to be developed to provide term funding to the banks. Banks also offer fixed interest loans but customers often choose loan having variable interest with the hope that interest rates will drop in future.
With the passage of time, consumer financing portfolio has increased but the quality of related banking services has become a serious issue. Processing delays, service inefficiencies, unauthorized debits and non-compliance with requirement of providing monthly bank statements are few examples of poor quality of banking services. Other issues such as non-transparent advertisements, violation of agreed terms and conditions, levy of unjustifiable charges, and arduous complaint redress mechanism, etc. also reflect upon the poor quality of consumer services. The press frequently reports such complaints, which speak of the issues in quality of banking services.
Aggressive marketing campaigns launched by the banks are targeting the consumers and repeatedly encouraging them to purchase a loan or credit card. In some cases, the banks have gone to an extent where a consumer who has not even applied for a loan, is informed through telephonic call that the bank has approved a loan for him. A majority of the bank users do not have enough understanding of the very basic rules and terms and conditions. Another problem is that the documents prepared by banks are usually technical and ordinary customer couldn't understand the terms and conditions easily.
Unrecovered consumer loans are on rise which is an alarming trend. Though banks have created separate divisions for loan recovery yet they are failed to recover the full amount of personal loans. Consumer financing has expanded in Pakistan at an unprecedented growth rate over the last seven years. The banks have intensively capitalized upon the demand for consumer financing and earned record profits. However, consumer financing has been helpful in improving the quality of life of the people who have the capacity of servicing the loans.