Revision of the personal loan limit

The State Bank on 6th January, 2011 directed all banks and DFIs to ensure that overall credit card and personal loan limits availed by an individual should not exceed Rs 5 million in aggregate at any point of time. In addition, the limit of Rs 5 million will be subject to the condition that overall unsecured or clean facilities on account of personal loan and credit card of that individual do not exceed Rs 2 million.
The State Bank also amended Regulation R-3 by adding a new provision which states that "Banks/DFIs may waive the requirement of 50 percent debt burden in case a credit card and personal loan is properly secured through liquid assets (as defined in prudential regulations) with minimum 30 percent margin." The employees of the banks/DFIs have, however, been exempted from the above conditions if such consumer financing is part of their compensation packages provided the detailed terms and conditions of the benefits, which the banks/DFIs want to give to their employees are specifically mentioned in the Employees Service Rules/HR Policy. These loans would be treated as staff loans and not as general consumer loans.
The setting of the maximum limit of personal loan and credit card limits for individuals by the State Bank could be justified on several grounds. In our context, such a step could particularly be vindicated on the basis of discouraging consumer loans and checking favouritism in the financial sector industry. Indirectly, therefore, the decision would promote savings in the economy, encourage the use of credit for investment and reduce the level of non-performing loans to a certain extent. It could also be argued that many households could be saved from unnecessary humiliation and harassment because of the general tendency in Pakistan to keep up with the Joneses and spend mindlessly on certain occasions like marriages.
However, we are of the view that it would have been better for the SBP to advise the Bankers' Association or individual banks/DFIs to prescribe certain guidelines regarding consumer finance themselves rather than taking the matter directly into its hand. We say this because boards of the banks/DFIs need to be vested with greater responsibility to manage their own affairs and the conditions in each financial institution could be different to treat such issues. Moreover, if the consumer loan is fully secured, there could hardly be any possibility of default and perhaps the need to prescribe a limit. However, in case the proposal to give a greater role to a body like Bankers' Association is accepted, it would be necessary to establish an efficacious consumer credit bureau for sharing the relevant information to check unscrupulous elements of society from taking undue advantage of the facilities offered by the banks.
Also, legal obstacles, if any, would need to be removed to put the proposal into practice. While on the subject, we would also advise the financial community including the State Bank to examine thoroughly the reasons behind the slow progress or acceptability of credit cards in the country and the measures to enhance their usage. The need to popularise plastic money is imminent due to a variety of reasons but such a useful instrument to settle ordinary transactions has failed to gain currency in the country. Compared to other countries, where cash is now hardly used, such an oddity is glaring.