The exalted grandeur of consumer banking in Pakistan was very short-lived; the anti-climax hit the sector in 2008 amid falling economic growth and rising interest rates, and there was no coming back for consumer lending. All the banks have been busy managing consumer delinquencies since then.
Still, with all its ups and downs, and despite the pause that seems here to stay for a foreseeable future, the best days of consumer banking in Pakistan lie ahead.
1990s was a period that did not assign a lot of value to consumer financing. Only the fortunate few had the luxury of carrying credit cards in their wallets. But a sweeping turnaround took place after misfortune struck the twin towers in Manhattan in 2001 -- forcing Pakistan to play a role in the war against terror that in turn paved way for a wave of foreign inflows in the form of investments as well as remittances.
The excess liquidity prompted banks in Pakistan to knock the doors of what was previously treated as the ugly duckling - the consumer sector. A series of aggressive marketing campaigns commenced, with banks lending out to consumers almost incessantly. As a result, the share of consumer loans increased form 9.4 percent in 2004 to 14.7 percent by 2007 with Rs357 billion forming the total consumer portfolio by September 2007.
Of the five main categories of loans in the consumer sector, personal loans has always had the largest slice of the pie, followed by auto loans, mortgage loans, credit cards, and consumer durable loans in that order. Of these, the consumer durables category has a very small share of the total consumer loan portfolio, with a share of less than 0.5 percent of the total loan portfolio of banks, according to the State Bank of Pakistan's (SBP) latest quarterly review of the banking system.
Led by a foreign bank, the programme-based, direct-sales model, whereby sales agents were compensated chiefly against the number of transactions made, adopted a very aggressive stance in a relatively nascent market. Naturally, with such a myopic evaluation criteria, the motivation was more to grab the maximum numbers of customers, without paying much heed to their individual risk profiles.
This model did wonders during the booming days of the economy when interest rates were at their ebb. Anecdotal evidence suggests that a junior officer at one bank became the consumer head in another bank in literally a snap of the fingers.
"Pakistani bankers were mostly corporate bankers; consumer banking was not their forte. There was only one international institution that had launched consumer banking, and a large majority associated with consumer banking in any bank in Pakistan had been trained by that institution. So they all had one fixed business model and implemented the same model without knowing it fully well and how it would pan out," describes Atif Bokhari, President and CEO United Bank Limited.
Aside from the unbridled lending by banks which were caught in a rat race called 'who lends the most', rising interest rates was a major reason for the doom of the sector.
The mark-up rates charged by many banks are pegged with the Kibor, with rates hovering around the range of 4 to 6 percent over Kibor. With the Kibor nearing 14 percent in the tightening stance taken by the central bank, consumer loans have been rendered quite pricey, and beyond the reach of many. Further, with the variable nature of interest rates, consumers are also deterred by the uncertainty of the interest expense they'd have to bear in a particular period.
The high interest charges, quite obviously, took their toll from poor consumers and the infection ratios of consumer loans soared considerably since 2008, and have been on a northward trajectory since then. The infection ratio of the consumer sector soared from 3.2 percent in March 2007 to as high as nearly 15 percent by June 2010.
In addition to these, the quality of services of consumer banking has also witnessed some deterioration. The Banking Ombudsman Report of 2009 quoted the highest number of complaints from consumer products, around 28 percent of the total number of complaints. Of that, the highest number of complaints was in the credit cards category, which made up 63 percent of the total complaints related to consumer banking.
The lack of consumer education aggravated this problem even more as most consumers were lured by banks' attractive offers. In most cases, the use of technical jargon in banking terms and conditions precluded the consumers from understanding the nitty-gritty of obtaining a bank loan, or, the consequences of defaulting against it, in the worst case scenario.
Faced with rising delinquencies, banks' only way out is a swift recourse to the law, especially in cases that involve significant amount of financing, such as the mortgage loans. However, from banks' perspective, the tardy implementation of law is to be blamed for their reluctance to give out house loans.
"I think the laws in Pakistan will have to be far more enabling to bring about an advancement of mortgage financing in the country. The process of repossession must be swift because banks will only lend if they are comfortable that the banks will be able to recover in case of a default," says Sultan Allana, Chairman, Habib Bank Limited, adding that a lack of long term funding sources for mortgage finance, which is a long-term loan liability, is also a reason for the diminished loan payout for house financing.
Initially, the availability and ease of access to bank loans spurred consumer spending in the country. This led to increased demand for many consumer items, the prices of which also increased, consequently, in the absence of adequate supply enhancement.
A 2008 report by the Consumer Rights Commission of Pakistan in sponsorship with the Asia Foundation, also said, "The demand for road networks and fuel imports has increased due to growth in auto financing. These developments have an overall inflation impact, which is affecting the purchasing capacities of the poor."
Consequently, the failure to set up adequate infrastructure to meet the requirements of the consumer boom stoked inflation which wiggled its way back to borrowing rates and hence consumer finance rates.
Thus, lack of coordination of fiscal and monetary policies during the first half of the last decade has had its share of battering in the whole saga of the boom and burst of consumer financing.
OUTLOOK
Contrary to experts' opinion, the share of consumer banking in the big five banks is not proportionate to the size of their assets. The aversion of the top banks to consumer loans can be explained by the low cost of funds of these banks, which prompted them to lend to the less risky corporations and the government in order to enjoy higher spreads.
Eventually, small and medium sized banks, with their high operational costs, will have to revert to consumer financing to prop up their profits, and might end up taking excess risk. The top 5 banks carry 49 percent of the total share of consumer loans while their total advances share is 53 percent - implying that there is still enough room for big banks to increase their consumer portfolio.
"You need scale in the consumer business," Arif Usmani, Country Officer for Citibank (N.A) points out.
Although, the high interest rate environment poses a big challenge, the consumer sector continues to be of importance as it serves the retail end of the market and many people do benefit from consumer financing services.
Consequently, steps should be taken to revamp this sector, albeit, cautiously. SBP will need to intervene to facilitate foreclosure laws and should work with government entities to have better laws.
"It's just not the legal aspect but also the behaviour of the courts," says SBP Governor, Shahid Kardar on foreclosure laws in Pakistan. He adds that there is also the question of building and zoning regulations, considering that there is a need for flats for middle and lower income households, which need to be addressed to support mortgage financing business in the country.
Banks will have to do their share by developing sound lending strategies to manage their risks well. After all, "we have 170 million people who are potential consumer loan customers," according to Shaukat Tarin, Director, Silkbank. And simply closing the doors on a market of this size may not be the best strategy.
The writer can be reached at sijal.fawad@br-mail.com