KARACHI, June 13: Despite high potential and top priority of both the government and the State Bank, consumer loans have drastically dropped from 70 per cent growth in 2005 to 11.9 per cent in 2007.

Banks have been charging heavy price for consumer loans and the sector remained high-profit yielding, but the growth fell sharply.

The ministry of finance’s comparative study of nine months (July-March) of the last three years showed that consumer financing was not in a good shape despite high growth in the banking sector.

After registering an extraordinary growth of 70.5 per cent in financial year 2005 between July and March, consumer loans have been exhibiting a deceleration; dropping to 31.6 per cent in FY 06 (July-March) and 11.9 per cent in FY 07 from July to March.The decline in the first nine months of the current fiscal was mainly due to high interest rate.

“While the July-March FY 06 slowdown also incorporated some base effect; the slowdown in July-March FY 07 was caused primarily by increase in interest rates as well as more restrained lending by banks,” said the economic survey 2006-07.

The deceleration in auto loans, in particular, was the largest contributor in total decline of private sector credit, the slowdown was attributed to three reasons.

These are increase in interest rates; low demand for automobiles as a result of increase in prices of domestic cars and low interest of consumer in imported cars and high insurance charges that have increased the effective cost of automobile.

The high interest rates also created bad debt in the consumer financing.

A private brokerage house study says that 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.

An analyst said that the growth was slowed down because of cautious lending by banks in the wake of rising bad debts specially in few sub-sectors of consumer financing.

The personal loans witnessed a significant deceleration during July-March FY 07.

In addition to increased cost of financing, the mandatory use of Credit Information Bureau (CIB) data by banks is also cited as a major reason in the slowdown of personal loans.

In addition, the SBP has given much emphasis on the need for ensuring closed monitoring of personal loans so that these loans are not utilised for speculative activities.

Besides interest rate increases, other contributory factors for a slowdown in private sector credit were the availability of non-bank finance to the private sector, including credit from NBFIs (Non-Banking financial institutions), increase in foreign private loans and issuance of corporate bonds in international market by the private sector companies.

In fact, a significant contribution to the realised FY 07 credit growth was due to provision of concessional financing facilities extended to the export sector by the SBP.

The slowdown in trade financing during July-February FY 07 is in line with the slowdown in aggregate trade volume deceleration in growth.