ISLAMABAD, July 25: Banks in Pakistan are earning windfall profits by taking undue advantage of the weak regulatory framework and are behaving like a cartel within the policy space provided to them by the State Bank.
This has been stated in a report, “Consumer financing in Pakistan: issues, challenges and way forward”, launched by the Consumer Rights Commission of Pakistan (CRCP) and the Asia Foundation on Friday.
According to the report, consumer financing has significantly contributed to the economic turnaround of the country by stimulating consumption and investments. There has been a phenomenal increase in the private sector due to easy availability of credit.
However, the report said, the manner in which consumer financing was being delivered had seriously jeopardised the competitiveness in economy.
“The most important issue is that Pakistan has one of the highest interest rate spreads in the world,” Hamid Siraj of the CRCP said while explaining details of the report.
He said that an analysis of the interest rate behaviour in Pakistan showed that the spread had vacillated between 5.95 and 9.58 per cent during the period from 1990 to 2005. In recent years, the spread has exceeded seven per cent on an average.
The report says the high interest rate spread indicates that competitiveness in the banking sector in Pakistan is either absent or very poor. This issue is largely attributed to weak regulation of interest rates despite the fact that the SBP has powers to control the spread through monetary policy.
While non-operating loans and high administrative costs could be considered as major reasons in countries where the spread is high, these cannot be said to be true of Pakistan because banks are earning huge profits at the cost of savings of depositors. High interest rate spread is damaging the competitiveness in the economy in general and in the financial sector in particular.
The report says the State Bank should exercise its powers to determine a reasonable rate of returns for banks as well as depositors. As a matter of priority, the interest rate spread should be reduced, at least, to the level of average spread in the South Asian region.
The banking sector is earning record profits by charging unrealistic and exceptionally high interest rates. As a result, despite considerable ratio of non-performing loans, the annual profitability of banks has reached 76 per cent on an annual basis over the past few years. This is evident from the pre-tax annual profit of all banks, which was Rs7 billion in 2000, but jumped to Rs123.4 billion in 2006. In recent months, deceleration trends are on the rise in consumer financing due to increasing loan default and use of credit worthiness information by the banks.
The report says that another critical issue is that almost all consumer loans are on the basis of variable mark-up, which has reduced the loan-servicing capacity of borrowers due to progressive increase in the rates. In addition, the growth in consumer financing has put great inflationary pressure on economy.
Consumer perspective
Acquisition of easy bank credit by household consumers has spurred the demand for many essential and luxury items. Ultimately, the increase in demand has not only escalated the prices of essential items, but has also stimulated hoarding and black-marketing, thus multiplying the problems for poor consumers. In fact, proliferation of loans has given rise to new development challenges. Citing an instance, the report says the need of new roads in metropolitan cities is directly linked with growth in auto loans provided by the banks.
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 because of the 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.
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, unauthorised debits and non-compliance with requirement of providing monthly bank statements are few examples of poor quality of banking services. For example, in the first eight months of the operation of banking ombudsman in 2005, about 40 per cent complaints filed with the ombudsman related to consumer products, 30 per cent of which were related to credit cards alone.
Consumer awareness
The study presents a critical analysis of the regulatory framework for consumer financing, emerging issues from micro and macro standpoints and the nature and magnitude of consumer grievances. Drawing on secondary data sources and user surveys, the study covers all main consumer financing products, including credit cards, car financing and leasing, personal loans and house financing. It provides evidence-based proposals for designing and implementing strategic and practical interventions to strengthen the regulatory mechanism and consumer financing sector in the country.
The study also concentrates on issues in consumer awareness on banking terms and conditions, policies, rules and regulations as a critical factor in securing financial rights. It says that as the consumer financing portfolio is increasing, unsolicited banking, processing delays, service inefficiencies, unauthorised debits, etc., are emerging as main problems for the users of consumer financing products. Better consumer education and improved access to information are central to address these problems, in addition to strengthening the regulatory framework.
Dear visitor, the comments section is undergoing an overhaul and will return soon.