June 03, 2007	Sunday	Jamadi-ul-Awwal 17, 1428

KARACHI, June 2: Banks have almost stopped financing for consumer durables because of higher default rate, second only to agriculture loans. While bankers see much potential in the consumer financing which has been yielding highest rate of income, they have cornered all applications for financing consumer durables i.e. refrigerators, TV sets, air-conditioners, computers and other related goods.

However, it might be surprising for many that auto loans have a small ratio of default despite massive leasing made in this sector.

“Data till September 2006 showed that the default in the auto sector was just 1.6 per cent,” said Mohammad Imran, head of research at the First Capital Equities.

The default in consumer durables had reached 14 per cent which was alarming for banks struggling to offset the impact of huge loan defaults of 1980s-90s.

The cut-throat competitiveness was not allowing banks to risk their money while induction of more professionals in the banking sector had made it possible to reduce risk-financing.

However, another brokerage house analyst pointed out that default in the first quarter of 2007 (January-March) increased substantially i.e. by Rs11 billion from Rs173 billion in December 2006 to Rs184 billion.

“After a consecutive decline in the last two quarters, non- performing loans of the banking sector registered an increase of Rs11.0 billion between December 2006 and March 2007,” said Atif Malik, a senior analyst at the JS Securities.

He further stated that the increase in banking sector non-performing loans was mainly due to rise in non-performing loans of commercial banks, from Rs135 billion in December 2006 to Rs143 billion in March 2007 – up by Rs8.3 billion.

Bankers said they would continue to supply credit to the agriculture sector although it was the biggest loan defaulter.

They, however, argued that the situation was now improving and the rate of default has come down.

But why banks have been risking their money by providing credit to a default-prone agriculture sector is yet to be explained by banks.

It is believed that the State Bank might be forcing banks to increase their credit supply to agriculture sector.

Bankers said they have shifted their focus of credit supply from farm land to livestock which has a minimum rate of default.

Default in agriculture sector till the end of September 2006 was 20.2 per cent. (The data till December 2006 is yet to be released by the State Bank).

Imran said: “Credit card business is rising in Pakistan.”

In fact, it has multiplied in a few years where rate of default is extremely low, say 1.1 per cent, while the corporate sector default rate is 7.3 per cent.

Both the government and the State Bank have been promoting SME sector as a job-oriented sector, but banks have started showing reluctance to supply more in this sector, saying the default in the SME sector was much more than the high-yielding consumer sector. The default rate of SME sector was 10 per cent.

Bankers argue that the SME sector was not taking roots in economy and would not grow as money being invested was not secure.

Bankers are eager to invest more money in the consumer sector, like personal loans, credit cards and auto loans as financing is currently being made at not less than 18 per cent.

Consumer financing has a share of around 13 per cent in total bank advances, but it has helped banks to continue with high profits and attract international banks for expanding their operations in the country.