Growth in consumer financing — personal loans, mortgage, credit cards, car leasing, etc — decelerated sharply to just above three per cent in FY08 after expanding by 17 per cent the previous fiscal.

The State Bank web site shows hefty decline in the consumer finance growth in absolute numbers too as the size of outstanding consumer loans grew by a mere Rs11 to Rs359 billion in June 08 from Rs348 billion in June 07. That compares with an increase of Rs51 billion in the banks’ exposure in this segment in FY07 from Rs297.77 billion the previous year.

Bankers attribute the slowdown in consumer financing mainly to the spiking cost of credit — the central bank has increased its key discount rate by 3.5 per cent to 13 per cent in less than 14 months, and consequent rise in default.

“The number of people approaching the banks for consumer financing has reduced substantially during the recent months because of the hiking interest rates,” an executive of Al-Faysal Islamic Bank, who deals with personal loans, told Dawn.

“Unlike past our sales teams have to work harder to find clients and convince them to avail personal loans or any other product,” he said, refusing to give his identity because he was not authorised to speak to the media.

He pointed out that banks too had become more cautious and vigilant in assessing the requests for consumer finance, particularly the unsecured products, due to the growing number of delinquencies on high interest rate regime.

“A combination of all these factors have hit the consumer finance market hard,” the banker said. The SBP web site says mortgage led growth in other consumer finance products during the last fiscal by rising to Rs66.55 billion from Rs54.67 billion. Its share in the outstanding consumer loans too enhanced to 18.5 per cent last fiscal from 15.69 per cent the previous year.

Car loans on the other hand dipped slightly to Rs104.99 billion from Rs105.44 billion and their share in total consumer lending dropped to 29 per cent from above 30 per cent. It stood just above Rs97 billion or 32.5 per cent of the consumer finance portfolio at the end of FY06.

Credit card loans made modest gains to climb to Rs44.45 billion from Rs42.82 billion. Their share too went up to 12.4 per cent in FY08 from 12.2 per cent in FY07.

The share of personal loans in the overall consumer finance loans dropped to just below 39 per cent from less than 41 per cent in relative terms and to Rs140 billion from Rs142 billion in absolute numbers.

Though total personal loan disbursements have consolidated by Rs20 billion during the last two fiscals to Rs140 billion from Rs120 billion in FY06, the share of these loans in the gross outstanding consumer finance has gone down by almost two per cent.

Lending of Rs500 million for consumer durables formed only 0.13 per cent of entire consumer credit disbursement, down from Rs1 billion or 0.33 per cent during the last financial year and Rs1.55 billion or 0.5 per cent in FY06.

Most banks are said to have made their “selection process” even more stringent for the disbursement of consumer finance as they try to target clients with good credit histories.

“That simply means the banks are selling their (consumer finance) products to the same people who have already availed one or the other facility in the past without defaulting on their loans,” he underlined.

“The runaway inflation, especially the food and energy prices and stagnant incomes have eroded the ability of people to pay heavy loan installments, thus increasing the default ratio and reducing demand for fresh lending,” he said. The political tensions, he added, had strongly affected the consumer confidence.

A central banker in Lahore, who asked not to be named said the slowdown in the expansion of overall consumer finance credit could also have been caused, though partially, by the retirement of the older or aging loans.

“Fresh consumer credit takeoff has taken a hit in the recent months. But it doesn’t mean that the banks are not approving fresh consumer loans. They are disbursing personal loans, issuing credit cards, leasing cars, etc, but at a slower pace than before,” he said.

“The slower growth in absolute numbers is reflective of only one part of the story and does not show the actual disbursement, default and repayment of the loans,” he said. He pointed out that the outstanding loan portfolio was around Rs376 billion at end January this year. “It means the reduction in total size during later months must have come from retirement of older loans or book cleaning by banks,” he said.

But he excused himself from giving the size of consumer loans disbursed and retired during the last financial year because he did not have the numbers and needed time for obtaining the details from the State Bank head-office in Karachi.

Pakistan witnessed a phenomenal growth in consumer banking during 2002-06 on the back of falling interest rates, liquidity flush in the banking system and growing incomes of the expanding middle class.

Consumer financing pushed by loose monetary stance of the central bank was said to be one of the major drivers of rapid increase in GDP during that period. But it also stimulated inflationary pressures in the economy, which continue to persist despite tight monetary stance being pursued by the central bank during the last three years. The escalating global oil and food prices too exacerbated the macro economic situation.

Many economic experts had questioned the official policy to push consumption led growth and warned of heavy defaults as personal indebtedness increased, cost of credit rose and incomes remained stagnant. Their predictions finally seem to be coming true, though the central bankers still don’t agree.

The State Bank of Pakistan says in its third quarterly report for FY08 that “the overall quality of the consumer finance has been good, but it started showing come some weakening. During the calendar year(CY) 06, the quality of consumer portfolio witnessed some deterioration as non-performing loans (NPLs) of this sector increased to Rs7 billion from Rs3.1 billion in CY05.

As compared to other sectors, consumer finance has so far shown a very low level of NPLs. In fact at 2.2 per cent, the NPL ratio is lower than corporate (6.5 per cent), SME (8.8 per cent) and agriculture (21 per cent). This level is lower than many countries including Malaysia, Philippines and United States.”

The State Bank reports say the share of consumer credit in total private sector credit is still lower at 14 per cent compared to other countries — 24 per cent in India and 30 per cent in Indonesia.

In terms of exposure, the level of indebtedness of consumers in all the products except auto and consumer durable has been rising persistently. Exposure per borrower in credit cards rose from Rs26,000 in CY05 to Rs32,000 CY06, in mortgage loans from Rs1.982 million in CY05 to Rs2.025 million in CY06, and in other personal loans from Rs89,000 to Rs100,000. It dropped from Rs430,000 in CY05 to Rs411,000 in CY06 in auto loans and from Rs29,000 in CY05 to Rs22,000 in CY06 in consumer durables.

The bank says: “Since mortgage and auto loans are adequately secured, the rising exposures in these products may not pose serious credit risk threats to the banks.

“However, rising level of consumer’s indebtedness on account of personal loans and credit cards, which are considered unsecured lending, warrant attention of the banks.”

But the foreign banker didn’t see much of a danger. “The banks have already adopted a tighter and more cautious stance and have vast data on the credit worthiness of borrowers. Therefore, we don’t worry much for any big loss to the banks on account of consumer financing unless every borrower loses capacity to pay back or decides to default on his obligations,” he laughed.

He was confident that the current slowdown in consumer finance market would reverse soon once political instability was taken care of, inflation controlled and cost of credit reduced. This situation won’t last long. Our consumer credit market still remains very small. It has a lot of potential to grow and to drive overall economic development of the country,” he said.