LOW INTEREST RATE GENERATES CONSUMER BANKING
SAAD ANWAR HASHMI
Oct 8 - 14, 2012
Retail banking is the core function of any bank and is the reason why banks often gain recognition in the market and the eyes of the consumers. Consumer banking or Retail 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 to give a bank first mover advantage. The pace with which consumer banking is growing in Pakistan is under question where banks are increasingly cautious with their lending practice leading through selective. The declining interest rates will benefit the existing customers through reduction in interest rates, however, the outcome of the reduction will only be visible in the next six months. If the advances increase, this would mean that consumers have approached banks for new loans and disbursements have been made. If after the decline in interest rates advances decrease, banks own internal policy and lending strategy will be under question.
Banks due to Non-Performing loans, are vigilant and would even consider declining a case which otherwise would be sound. There have been numerous instances where such reasons for refusal become superficial. 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 based on latest figures released by SBP 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.
Focusing on individual businesses, the consumer portfolio is highly sensitive to margins as information of one banks offering is available to the other. The interest rates however, will put less financial strain on existing consumers and will also reduce the bottom line of the bank if advances do not increase as the overall quantum of interest income through reduced interest rates would register a decline.
Credit cards are the most popular of the products. Some banks including Faisal bank and Summit Bank have launched credit cards, however, based on more stringent criteria. Existing banks 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 criteriaís stated earlier. Any change in interest rate is less likely to affect the demand for cards as the interest rate is pre determined and higher than any other product. The spread charged by networks including VISA and Master Card is expected to remain same per transaction.
Mortgage loan advances decreased 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. Any decline in interest rate will benefit this sector the most since.
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. With the increase in cost of living and inflation, people are not willing to tie themselves in a debt burden through payment of car installments considering the interest rates. The lowering of the discount rate by 150bps may be beneficial for new consumers interms of the interest rate, however, it is too early to analyze with conclusive evidence whether reduction in interest rate will increase auto financing. Consumers more than willing to purchase a vehicle blame banks not only for interest rate charged and the spread over the benchmark lending rate but also tougher qualifying criteria for an auto loan disqualifying many.
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 was 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. With declining inflation, we SBP is further expected to announce another reduction in interest rate between 50 bps to 100 bps. In addition, this measure is being taken to revive the economy and encourage production and expansion projects. Though the reduction in interest rate will be a welcome sign and will benefit the economy, the question remains if banks are also eager to make disbursements.