Oct 8 - 14, 20

From the macroeconomic standpoint, consumer financing is considered one of the factors for bringing economic turnaround by stimulating consumption and investments. In the recent past, there has been a phenomenal increase in private consumptions due to easy availability of credit from banks. However, in tandem with this development, the manner in which consumer financing is being delivered has seriously jeopardized the competitiveness in economy.

The most important issue is that Pakistan has one of the highest interest rate spread in the world. High interest rate spread indicates that competitiveness in the banking sector in Pakistan is either absent or is very poor.

The concept of consumer financing is based on the need for an institutional arrangement that provides consumers with financing support to enhance their consumption and, as a result, improve their standards of living.

The consumer financing portfolio in Pakistan has been shrinking for the last few years mainly on account of weak economic conditions, rising cost of credit and rising non-performing loans of the banks.

The overall volume of consumer is continuously showing a declining trend as evident from the fact that during the nine months of the outgoing fiscal year (July-March) overall stock of consumer financing was shrank by Rs8.5 billion as compared to the decline of Rs17.4 billion in the same period of the financial year, according to official figures.

Auto loans, mortgages, credit cards and personal loans have consistently been on the decline since January 2008. The stock of consumer finance reduced to Rs209.1 billion in March 2012 from its peakof Rs371.3 billion exactly four years earlier. Loans for consumer durables witnessed a net expansion of 37.1 percent from July 2011 to March 2012 against 13.9 percent in the same period last year.

According to figures incorporated in the Pakistan Economic Survey 2011-12, the financing for the house building stood at Rs5.20 billion against Rs5.40 billion while in terms of transportation, including purchase of car, banks disbursed Rs5.60 billion compared with previous amount of Rs10.60 billion to the consumers. The financing under the category of credit cards fell to Rs1.70 billion during July-March FY12 against Rs3.40 billion a year earlier. Personal loans financing reached at Rs2.70 billion against Rs0.40 billion in the previous year. 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. The unethical practices and parallel banking operations by staffers is considered one of the prime reasons, which not only hampered the growth in the consumer loans, but also hurt the credibility of the banking sector, said a latest report released by the Banking Mohtasib Pakistan (BMP).

A critical issue is that almost all consumer loans are on the basis of variable mark up, which has reduced the loan servicing capacity of the borrowers due to progressive increase in the rates. In addition, the growth in consumer financing has put inflationary pressure on the economy. Acquisition of easy bank credit by the household consumers has spurred the demand for many essential and luxury items. From a consumer perspective, consumer financing has been helpful in improving the quality of life of the people who have the capacity of servicing the loans. However, there is mounting evidence that this capacity is deteriorating due to high spread and variable interest rates on loans. Depositors are not getting due returns due to high difference between lending and deposit interest rates. Further, the volume of consumer complaints is rising day by day due to processing delays, service inefficiencies, hidden charges, and poor disclosure practices. Nevertheless, lack of consumer education on banking terms and conditions, policies, rules, and regulations is also a critical factor in securing financial rights. As the consumer financing portfolio is increasing, quality of related banking services is becoming 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.

Consumer financing is broadly categorized into the following four types of products:

PERSONAL LOANS: Personal loans include the loans provided to individuals for the payment of goods, services and expenses, and include 'running finance' as well as 'revolving credit' to individuals. The running finance is a credit facility established for a specific time limit at variable interest rates whereas revolving credit is a line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. Besides, in revolving credit, the loan is repeatedly available up to a specified amount as periodic repayments are made.

AUTO LOANS: Auto loans include any loans used to purchase a vehicle for personal use. The loans borrowed to purchase vehicles for commercial or corporate use are not included in this category.

HOUSING FINANCE: Housing finance includes the loan, which is provided to individuals for the purpose of 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 purchase of land plus construction.

CREDIT CARDS: Credit cards include any card, which a customer can use to borrow credit from a bank. According to the PRCF, credit cards include charge cards, debit cards, Stored Value Cards (SVC), and Balance Transfer Facility (BTF). Supplementary credit cards are considered part of the principal borrower according to the Prudential Regulations, whereas Corporate Cards are not included in this category.

On the other hand, consumer financing has significant impact on inflation, which is rising sharply. In face of the economic challenges facing Pakistan, the SBP can no longer afford to overlook the state of poor competition in the financial sector.

There is mounting evidence that this capacity is deteriorating due to high spread and variable interest rates on loans. Depositors are not getting due returns due to high difference between lending and deposit interest rates. Further, the volume of consumer complaints is rising day by day due to processing delays, service inefficiencies, hidden charges, and poor disclosure practices.

All banks needs to provide latest copy of Terms of Conditions and Schedule of Charges to all applicants for consumer loans and credit cards well before signing the application form. The applicants should be encouraged to read and understand these documents before they enter into the agreement. There is a need to establish independent consumer credit counselling centres such as those established in the USA. These centres should develop and implement programs for consumer education on one hand, and provide advice to the consumers to choose the right kind of products.

Analysts believe that cut in the interest rate is likely to compel bankers to reignite consumer financing, particularly car financing. Recalling FY07, when the car industry posted highest sales of 193,000 units, they said that car financing was the major driver, contributing about 40 percent of car sales. "Therefore, cut in the policy rate holds the potential to once again rejuvenate car sales and compel us to re-rate our outlook for the sector," they added.

However, they said, the growth in sales might take time and the impact of car financing might be visible from FY13 onwards.

"We believe that the leasing which is currently contributing around 10-15 percent in car sales will gradually improve to the levels we saw 5 years back given low interest rate scenario", he said. "Though we believe car sales will remain suppress in FY13, car financing would propel sales in FY14 and beyond", he said. "We expect FY13 sales to drop by 16 percent but show an improvement of 18-20 percent in FY14 and FY15 to 180,000 and 210,000 units respectively", he added.

The auto parts manufacturers stated that to attract foreign and domestic investment, good law and order, political stability, provision of uninterrupted electricity and low interest rates are crucial.

They called for rationalisation of consumer finance schemes rates for car financing, urging the authorities to refuse consumer financing of used or imported cars, as they do not contribute to any economic process or industrialisation. They suggested the government to impose necessary safeguards for vibrant industry, however the industry must also respond with an aggressive localisation drive that shall enable it to place better priced vehicles in the Pakistan market.

In order to make available and affordable vehicles to the Pakistani public a special consumer finance/leasing schemes with single digit markups be reintroduced for locally made cars, two wheelers, HCV and buses (linked with local contents) to promote growth of local auto industries, besides creating employment and generating investments in high cost components and assemblies they elaborated.