Call it a result of improving economic growth prospects or link it to the banks’ appetite for higher returns, the fact remains that consumer financing is finally going up in Pakistan.
The outstanding position of loans under the consumer financing category at the end of August was Rs254.9 billion, up 11.8% from a year ago.
Latest data by the State Bank of Pakistan (SBP) shows consumer financing has not been that high for the past four and a half years. The last time banks extended credit for car/durables/home purchases, credit cards and personal loans that generously was in February 2010 when consumer financing amounted to Rs256.5 billion.
So after many years of sluggish growth in consumer financing, what makes commercial banks so eager now to finance people’s purchases against their future incomes and cash flows?
Speaking to The Express Tribune on Saturday, analyst Zeeshan Afzal said the overall sentiment about economic growth improved significantly following the 2013 general election. “People expected economic improvement and that encouraged banks to enhance their consumer financing,” he said.
Afzal’s observation is validated by the Consumer Confidence Survey released every two months by the SBP and the Institute of Business Administration, Karachi. The Expected Economic Conditions Index went up three consecutive times between November 2013 and May 2014, reflecting people’s overall optimism about the economy’s future.
Banks responded to the positive sentiment and consumer financing saw a substantial increase mainly on the back of credit extended for the purchase of vehicles.
At the end of August, outstanding position of loans for the purchase of vehicles amounted to over Rs65 billion. This was Rs12.9 billion, or 24.7%, higher than the comparable figure recorded at the end of August 2013.
The last time commercial banks had outstanding car loans higher than Rs65 billion was over four years ago when they amounted to Rs66.4 billion at the end of May 2010.
Afzal said banks get higher spreads – the difference between average lending and deposit rates – by enhancing their consumer financing. “Unlike loans to businesses, personal loans are extended at a higher interest rate. Banks sometimes charge as much as KIBOR plus five on these loans,” he said while referring to the Karachi Inter-Bank Offer Rate, which is the daily reference rate at which banks lend unsecured funds to each other in the money market.
Deposits of commercial banks have grown 14.6% annually for the last five years, but the overall increase in loans over the same period has only been 5% a year.
Last year the SBP also changed the methodology of calculating the minimum interest rate that banks must offer on their savings accounts. It made consumer financing for banks more attractive, as they looked for ways to enhance their spreads.
The year-on-year increase in consumer financing in the category of durable items was 75.4% at the end of August. Similarly, the increase in the outstanding credit in the category of personal loans was 12.4% during the same 12-month period.
Although the numbers on consumer financing look good for now, analysts warn against raising hopes about its re-emergence a la the mid-2000s.
The average increase in the outstanding advances of commercial banks in the ‘personal’ segment between June 2004 and June 2008 was as much as 27.7% a year.
“I don’t think the expansion in consumer financing is going to be as massive as we saw in the 2000s. Banks have learned their lessons and they will not go on a lending spree,” Afzal said.
THE WRITER IS A STAFF CORRESPONDENT
Published in The Express Tribune, November 3rd, 2014.
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