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KARACHI, Jan 14: All banks combined made Rs29 billion personal loans in July-November 2003, more than three times the personal loans of Rs9 billion they had offered in July-November 2002, according to figures obtained from the SBP Economic Policy Department.
Senior bankers say this big increase in personal loans was responsible not only for increasing overall private sector credit take-off, but also for pushing up average lending rate. "The reason is that personal loans are made at a much higher rate than the corporate loans," explains head of credit of a large local bank.
At Rs29 billion, personal loans made up more than 23 per cent of the total private sector credit offtake of Rs124 billion in five months to November last year. It was because of this high share of personal loans in overall private sector credit that weighted average lending rate that had bottomed out at 5.02 per cent at end-August rose to 5.49 per cent at end-November.
Banks having surplus liquidity have been offering liberal personal loans to eligible individuals for buying cars, TVs, refrigerators and a host of other items of daily use. They have also been making loans to individuals to help them continue education, take a trip abroad or just shop around for no particular purpose. Personal loans are not only being offered direct from the bank counters, but also through credit cards.
Banks have hired young people to market credit cards and other products of personal loans to eligible individuals - drawing a certain amount of basic salary and meeting such other conditions as working for some reputable organizations, etc.
In July-November, banks were offering corporate loans at 4-6 per cent to majority of corporate borrowers and at 7-8 per cent to other commercial clients not having very sound financial health. But they priced personal loans at 9-16 per cent, the higher rates applying mostly on credit card users.
The possibility of high-rate lending in an overall low interest rate environment lured many banks to increase profile of personal loans: they even struck deals with manufacturers of automobiles, electronic goods and other items of daily use, whereby they would offer loans to individuals only to purchase certain brands. The ploy worked and personal loans grew rapidly.
INVESTMENT IN STOCKS: During July-November last year, banks also invested more in stocks for the same reason - to employsurplus money in high-rate investment in an otherwise low interest rate environment.
The recently elected chairman of the Karachi Stock Exchange, Arif Habib says the banks did this because "equity investment was more attractive and more remunerative."
According to the data released by the State Bank, banks and DFIs increased their overall exposure in stocks from Rs34.3 billion at end-June to Rs43.5 billion at end-November 2003.
This trend continued through December as well and at end- December the overall exposure of banks and DFIs in stocks rose to Rs46.7 billion.
Of this, Rs37.3 billion stood invested in quoted shares and Rs9.3 billion in badla financing or financing of carryover trade of shares, which many in the financial sector consider riskier for banks. But Mr Habib says the rules governing "badla financing are so stringent that banks' exposure in it is much safer than traditional lending". "We at the stock exchange make it sure that badla financing or lending against share does not expose banks to risks they cannot manage," he told Dawn. "They are supposed to deposit over 30 per cent of the amount borrowed or lent and their outstanding positions are required to be settled on mark-to- market basis."
The aggregate capitalization of the Karachi Stock Exchange rose from Rs765 billion as on July 4, to Rs922 billion on December 26, 2003. The KSE 100-share index soared from 3,478 points to 4,393 during this period.
