KARACHI, March 1: Falling interest rates, low corporate credit demand and grim outlook for margins are driving the local commercial banks towards a more profitable consumer lending.
With vast long-term potentials, consumer financing can provide impetus to development of a wide range of industries including housing, automobiles and household goods producers. Consumer spending accounts for two-thirds of US economic growth. In rich countries, investment in housing is reckoned nearly twice as much as in stocks.
The size of consumer finance market, however, depends on the level of prosperity and the consumers’ capacity to repay debts. For bankers, consumer lending means greater risks and more hassle to deal with a large number of middle income clients. But it brings more profits.
From the point of view of borrowers, the loans should be affordable. For example, a major thrust in housing finance can be made “if rentals are equal to mortgages,” says a middle income prospective buyer. The rental saved should, more or less, be enough for debt repayments to encourage borrowing for building houses. Interest rates should come down to a single digit. Tax exemption ceilings should be raised and land should be available at affordable prices.
The views of borrowers can be summed up as follows: A 12-13 per cent interest on loans for purchase of household goods does not encourage many to borrow from banks as, with the addition of upfront charges, the rates go up by 2-3 per cent. This is simply unaffordable.
But growing competition among an increasing number of lenders is bringing down interest rates. Commercial banks now give auto loans at 10 per cent and leasing companies charge 12-14 per cent though upfront bank fees and charges keep the leasing companies competitive, says a leasing company executive. In the field of consumer financing, auto loans are seen more secure loans.
Banks have concluded single company arrangements for purchase of consumer durable. The borrowers do not have the choice to pick up from a wide range of brands and the company ‘s declared prices are seen as uneconomical. Buyers can often strike a much better bargain on declared price at retail shops. The company sale volumes go up with lending and the buyer should be entitled to a discount rate. It could make the loans more affordable.
Bulk of the deposits in the banks come from small savers. For big banks, the deposit rates on PLS accounts range between 2.5-3.3 per cent, the lowest in industry and are below the official inflation rate. The smaller private and foreign banks are offering 4-5 per cent.
Whereas, the big corporates get loans at 7-9 per cent, the middle income depositor/borrowers are charged at the double digit rate. In industrial economies, the difference between deposit and lending rates is two per cent, in India four per cent and in Pakistan it is much higher. Why should small borrowers be made to pay for defaults in corporate debt repayments?
Financial analysts say that banks have resisted reducing lending rates and cuts in deposit rates have outpaced fall in lending rates in 2002.
But, the commercial bankers have their own risk perceptions and problems. And lending rates are linked to risks.
Managing director of Pak-Gulf Leasing Company A.B. Shahid says that there are “delicate issues that require focused attention. The first is the lack of institutional arrangements and practices hampering consumers’ repayment risk assessment.
He complains that employers either do not certify or certify very inadequately, the employment status of the person seeking financial facility. Fewer are prepared to confirm that they have placed on their records the bank facility extended to their employee. Fewer still are prepared to accept the responsibity to inform the lender if the borrower- employee leaves the employer or is asked to do so. Employers’ certificates are inadequate for assessing future repayment capacity.
A Taurus Securities (TS) research report says “Consumer banking involves higher set-up and transaction costs, but offers higher returns, is more easily scalable and is a market for better long term potential.”
“However, consumer banking has its own problems, Within the consumer space, auto-finance may have already been saturated and will not offer much room for growth. The same is true for credit cards unless bank target customers in the middle-income groups which they have been reluctant to do.
Home loans and mortgages are an area banks are beginning to look at more closely but given a difficult legal environment for enforcing property rights, this still poses considerable problems which will limit the growth of the financial market. Hence, all that remains is the personal loans/short-term consumer credit market to finance purchases of consumer durable. All major banks are now focusing on consumer banking to bring growth, this market will become very competitive in the coming year.”
“The rewards from a stronger focus on consumer banking will only happen over time as the bank improves its customer service, renovates branches and sets up IT infrastructure that is central for the success of this market.”
The views of TS researchers are however not shared by bankers who say that there is demand for auto loans from people wanting to replace old second hand cars. Besides, there is inflow of remittances from overseas Pakistanis that is pushing up consumer demands, at least, in urban areas.