Consumer financing: the highs and lows

Cheers! Consumer financing advanced by the local banking sector grew by over 4 percent during 10MFY13 as against the drop of 4 percent during the corresponding period last year.
Besides different heads of personal financing, auto financing remained the major growth propeller.
But hold on! Consumer financing, despite modest growth patterns witnessed recently, has yet not achieved the level last seen before global financial crisis of 2008.
Consumer financing made up over 15 percent of the total private sector credit advanced by the banking sector in 2006 with an absolute share of Rs297.7 billion as of June 2006.
The proportion remained quite sticky until 2008. However, since May 2008, discount rates began climbing so as to contain high inflationary pressures (19.3 percent pre-rebasing) prevailing in the economy. In tandem, consumer financing which entails high mark-up over and above discount rate started plunging. Hence, consumer financing barely constitutes 6.8 percent of the total private sector credit as of April 2013.
One area that begs question is that despite the discount rate reduction since July 2011, no major upturn is witnessed in the consumer financing portfolio of the banking sector. It appears that Pakistani banks, in an effort to keep their asset portfolio clean from non-performing loans, are shying away from the risky yet high yielding avenue.
An industry insider told BR-Research that the lending/deposit spreads in the local banking industry are declining for quite some time now. Yet, Pakistani banks are earning sufficiently higher spreads than their regional peers. This enables them to effortlessly park their funds in the government securities and make satisfactory profits, while overlooking the risky ventures as consumer financing.
Consumer financing departments of commercial put forth another side of the picture. A consumer financing head of a leading commercial bank opined that although inflation is down ticking, yet is unable to provide a significant boom to the real income of the consumers. Hence, there is a low appetite for consumer loans. Besides, the strict regulations prescribed by the SBP further rationalize the consumer loan disbursals.
Industry experts further divulged that the up tick witnessed in the auto loan recently is due to relatively easier procedures involved in auto financing. Besides effortless valuations, being highly liquid, vehicles claim lesser losses on banks books in case of default. Hence, banks yearning for higher returns are largely venturing on the auto loans category of consumer financing.
With monetary easing appearing to be a soon ending phenomenon, the future of consumer financing seems not too bright. However, the promise made by the new government to enhance credit facilities for low income housing, if holds true, might turnaround the future of the so far deserted avenue.