THE consumer financing may already have seen its peak for many years to come, bankers say.
“I do not think the declining trend in consumer financing would reverse any time soon even if we are able to successfully turn the sliding economy around,” says an executive of Alfalah Bank Limited.
“The multiple factors responsible for the decline in consumer financing over the last some years may disappear tomorrow. But the banks will take many years to recover from their groove before they aggressively restart marketing their consumer financing products.
Until then we are going to see a cautious consumer lending based on very tight criteria used in the selection of borrowers,” he argues.
Another banker, who has worked in the consumer finance division of MCB, partially agrees with the Alfalah Bank executive. “No doubt most banks, particularly the big ones, have developed a strong aversion for consumer lending due to increasing default over the last some year. Yet they are aware that it will constitute a bigger chunk of profits of the banking industry in the years to come once the economy is able to recover. The future of commercial banking is in consumer financing. It has huge growth potential,” he insists.
He points out that some banks, especially the smaller ones, are trying to increase their presence in the consumer finance market. “However, it is not so visible because the banks, unlike the past, are avoiding unsolicited marketing of their consumer finance products,” he says.
“You may not be bombarded by these banks’ sales teams with text messages to buy their credit cards or auto loans, but they are in the market ready to lend you money if you want it and if you have a good credit history and regular income to support your case. The banks are very careful in choosing their potential customers in view of the losses suffered by them on account of widespread defaults on credit cards, personal finance and auto loans.”
Consumer financing — auto loans, mortgages, credit cards and personal loans — has consistently been on the decline since January 2008 when it touched its peak. The stock of consumer finance fell by a hefty 43 per cent to Rs210 billion in January this year from its peak of Rs371.27 billion exactly four years earlier. The stock of house building loans fell by 36 per cent to Rs43 billion in January this year from its peak of Rs66.55 billion in June 2008. Similarly, auto loans are down by 60 per cent to Rs45.42 billion after touching the high of Rs112.45 billion in October 2007.
The stock of credit card loans has dropped by 51 per cent to Rs23 billion from Rs47 billion in November 2007 and of personal loans by36 per cent to Rs92.5 billion from Rs147 billion. A combination of multiple factors — deteriorating economic conditions, rising cost of credit, increasing default, etc — is blamed for the negative growth in this segment.
Each category within the consumer finance segment has registered a persistent increase in the loan infection ratio for the last three years. This increase has been a combination of rising NPLs and declining credit to each category with the exception of consumer durables, according to the annual report of the State Bank of Pakistan on the performance f the economy during last fiscal.
“The bankers have grown risk-averse in the recent years because of rising defaults on the back of deteriorating economic conditions and rising interest rates. The opportunities to invest in risk-free government papers is keeping them from lending to the risky business segments like consumer financing as their non-performing loan portfolios mount. Many banks have downsised their consumer finance sales teams while others have closed down their consumer loan divisions to avoid more defaults,” says financial analyst Shahid Zia.
On the demand side, he says, the number of borrowers seeking consumer finance has also sharply decreased. “There is a visible decline on the demand side because of higher credit costs, stagnant incomes and job losses. The majority of people going to banks for clean lending belong to small to medium sized businessmen. The number of salaried, fixed income people seeking clean lending is very small because the years of high prices and stagnating incomes has reduced the ability of such people to spare a fixed amount of money every month to pay auto, personal or house building loan instalments,” he says.
The bankers concede that consumer financing is of crucial importance and constitutes a significant portion of the banks’ lendingportfolios in mature economies. But they say the way it was pushed in the early 2000s by the banks was wrong. “Unsolicited marketing and lax criteria in the selection of customers is mainly responsible for the substantial default in the consumer loans.
But the banks have learnt their lesson and are unlikely to repeat the past mistakes in future,” says the MCB executive.