Net consumer financing that remained negative not long ago is now soaring to new heights.

“It’s just about higher demand,” says the president of one of the top five banks, explaining a phenomenal net increase of Rs46.5bn in consumer financing in the first half of this fiscal year (July-Dec 2016). This amount is far higher than that of consumer financing — Rs33bn — in FY16. And, it is quite a record as percentage of total lending to private sector businesses as well (see table).

“Banks are more open and confident now in accommodating consumer loan demands,” says the head of another, mid-tier, bank.

Where is the demand coming from? And, what makes it feasible for banks to give more consumer loans?

So, where is the demand coming from? And, what makes it feasible for banks to give more consumer loans?

The bulk of the demand in1HFY17 came from two sources: auto loans

and personal loans though mortgage loans and credit cards had been main conduits of consumer lending in the recent past. Auto loans are a continuing trend.

“But the kind of demand we saw, and still see, for personal loans (in 1HFY17), is unprecedented,” says the head of consumer finance of a local bank. One plausible explanation for this could be that “people (read bankers and those employed in, or connected with, financial markets) were getting personal loans mostly for investing in informal and grey-area businesses and in stocks.”

Mid-tier bank executives frankly admit that during July-December 2016 they facilitated friends and colleagues in obtaining personal loans so that they could buy cars and induct the same into Careem and Uber fleets for commercial gains. They were the people who, for some reason, were not entitled to getting auto loans.

Similarly, months before the phenomenal rise of the stock market in January, officials of banks and financial institutions got personal loans for themselves and for their friends and relatives to invest in low-priced stocks. The smarter amongst them must have made quick bucks as the PSX-100 index soared from less than 32,000 points to the historic high of 50,000-mark late last month.

Not too long ago, consumer financing remained negative for two consecutive years, in FY11 and FY12. But it restarted expanding, with a big bang, from FY13 when it made up 88pc of the historically lowest net lending to private sector businesses. However, in terms of volumes, the big boost came in FY14.

Then in the last two years it remained almost intact, in terms of volumes, and we see a dramatic rise again during this year. “One underlying reason (behind this pattern) is that after the installation of the new government (in mid-2013), the economy began growing faster, people’s income levels went up and pent-up demand for consumer credit surfaced,” insists a top official of the state-run National Bank of Pakistan. (Per-capita income rose from $1,064 in FY12 to about $1,561 in FY16).

The assumption of a link between expansion in consumer financing and higher per-capita income is borne out by historical record.

Consumer finance is offered for: (1) housing building (2) purchase of automobiles (3) credit cards and (4) consumer durables. Personal loans also come under consumer financing.

During the last four fiscal years, auto loans, housing loans and credit cards have shown enough growth. “This can hardly happen without genuine demand. The emergence of such additional demand has historically coincided with the periods when per-capita income is ascending,” says a former central banker. During the first half of this fiscal year, loans for consumer durables have also recorded a huge 94pc growth, rising to Rs1.486bn in December 2016, from Rs764m at the end of June, official stats reveal.

This is the fastest growth in loans for consumer durables (air-conditioners, fridges, TV sets, smart phones and laptops etc) witnessed in the recent past. “Loans for consumer durables almost invariably move up with increase in income levels of middle-income groups.”

Bankers say a stable interest rate regime, increase in deposits growth, prudent regulations, and banks’ increased ability to assess repayment risks of consumer loans, are all responsible for promoting consumer lending. “But on the top is the prospect of earning a far higher return than in any other area of lending,” sums up the head of consumer finance of a large local bank.

Depending upon the class of loans, credit volume and credit history of the clients, banks are charging 12-24pc interest on consumer loans.

“Besides, as branchless banking and internet and cell phone banking transactions are becoming popular, it is easier now to make consumer loans at a far less cost than in the past.”

Published in Dawn, Business & Finance weekly, February 6th, 2017