Consumer loans fall as interest rates rise

 

By Mohiuddin Aazim

In nine months to March 2007, disbursement of consumer loans fell 42 per cent to Rs38.8 billion, from Rs67.2 billion in a year-ago period (See Chart). This fall is responsible, in part, for an overall decline in private sector credit. In ten and a half months to May 19, the private sector borrowed Rs264 billion from banks, 22 per cent less than their borrowing of Rs340 billion in the same period last year.

There are many reasons for a sharp decline in consumer loans. The number one is a rise in interest rates. Weighted average lending rate rose to 11.29 per cent in March 2007 from 10.40 per cent in June 2006. Accordingly, the effective interest rates on consumer loans shot up, thus reducing the demand for these loans.

Besides, many people in middle income groups could not service their car loans or other personal loans. This shook confidence of others around them to seek consumer loans. In less-privileged localities, people who had got cars on bank loans transferred the lease documents to others after they failed to service high-priced loans. Thus, fresh demand for auto loans was met but the volume of loans and the number of borrowers remained intact.

During July-March FY07, disbursement of auto loans declined to Rs7.6 billion—or about one third of the Rs23.2 billion loans distributed in July-March FY06.

Apart from high interest rates and low demand for local and imported automobiles, increased prices of domestic cars and higher insurance charges also led to decline in demand of consumer credit.

In addition, the slowdown in consumer loans in July-March FY07 was a natural reversal of very high growth in these loans in the same period of last two fiscal years. In July-March FY05, consumer loans had grown 70 per cent and in July-March FY06 they still grew 32 per cent.

Another reason for a fall in consumer loans is that from 2006, banks began to set borrowing limits for their clients after netting their aggregate take-home income by the total financing availed from other banks.

Moreover, the SBP’s guidelines issued to curb the misuse of personal loans in speculative activity in the real estate and the stock market also slowed down disbursement of these loans. These guidelines refrained banks from financing premiums on car deliveries; required them to offer housing loans against a construction schedule and barred subscription of Initial Public Offerings from personal loans. In July-March FY07, disbursement of housing loans remained a bit slower than in July-March FY06 but it was somewhat on track.

Bankers say that since international investors are venturing into building new housing schemes, housing loans would pick up in the next fiscal year. Besides, as the interest rates may not rise, as fast in the next fiscal year as this year, that would likely spur the demand for auto loans and other consumer loans as well.

In the next fiscal year, interest rate increase would be modest, as the policy makers are likely to contain inflation more by raising food supplies and less through monetary tightening.

During July-March FY07, the consumer loans for credit cards also declined to Rs7 billion from Rs10.3 billion in July-March FY06.

Bankers admit that credit cards’ business fell due to very high interest rates and poor post-selling services. If interest rates remain stable and banks improve after-sale services, the business would increase in the next fiscal year or at least remain intact.

A revival of consumers’ demand also fits well into the overall strategy of economic growth—the government has targeted 7.2 per cent growth in GDP for FY08. The handsome economic growth in the past few years had its roots in double-digit growth in exports and a boom in consumers’ buying. Growth in exports during this fiscal year would hardly exceed five per cent against the target of 12.7 per cent. (In 10 months to April 2007, exports grew only 3.3 per cent to $13.91 billion).

So, a revival of domestic demand through enhanced consumer buying can compensate for the shortcoming on exports’ front.

During this fiscal year, a marked slowdown is evident not only in consumer loans but also in overall private sector credit. Business leaders and bankers say that the private sector credit off-take might remain below Rs300 billion at the end of the fiscal year, against the target of Rs390 billion.

In addition to higher interest rates and reduced appetite for bank credit in textiles, sugar, cement and other industries, a higher-than targeted borrowing by the government also squeezed flow of credit towards the private sector. Between July 1, 2006-May 19, 2007 the government sector’s borrowing for budgetary support totalled Rs212 billion, exceeding the full fiscal year target of Rs120 billion. This crowded out the private sector, borrowing, notes the third quarterly report of the State Bank of Pakistan.

The government may, however, retire part of this debt before the close of the fiscal year, through the rupee-counterpart of the recently launched $750 million Eurobond. The bond would create rupee funds of Rs45 billion.

Private sector credit has declined not only due to high interest rates and crowding out by the government but also because of other factors. These include private sector’s increased borrowing from non-bank financial institutions and foreign bonds and its enhanced use of retained earnings.

Besides, internal restructuring of large privatised banks and acquisitions and mergers in the banking industry also extended the time lag between loan approvals and actual disbursement of loans.

Although overall private sector credit flow remained subdued in July-March FY07, some sub-sectors witnessed robust growth. Manufacture of food items, for example, consumed bank credit of Rs30.1 billion, up from Rs16.9 billion in a year-ago period.

Likewise, borrowing for manufacture of iron and steel rose to Rs7.9 billion and borrowing for manufacture of domestic appliances to Rs6.9 billion against Rs3.4 billion and Rs1.4 billion respectively.

Private sector credit to electricity, gas and water supply sub-sectors shot up to Rs12.3 billion in July-March FY07 from Rs2.4 billion in July-March FY06. Bank credit for transport and communications also jumped to Rs13.9 billion from Rs5.7 billion. And borrowings of petroleum refining sector shot up to Rs5.4 billion in nine months to March 2007 from a net retirement of Rs0.2 million in a year-ago period.

Even within the textile sector whose borrowings from banks fell drastically, borrowing for manufacture of wearing apparel rose to Rs8 billion from Rs1.4 billion. The borrowing for overall manufacture of textiles, however, slumped to Rs21.6 billion in July-March FY07 from Rs69.5 billion in July-March FY06.

The slowdown in the private sector credit had a dampening impact on the performance of the large-scale manufacturing which grew 8.8 per cent in nine months of this fiscal year, against 10.7 per cent in the same period of last year.

In FY08, private sector credit would pick up broadly for two reasons. First, large privatised banks that collectively control 35 per cent of the total advances market would accelerate loan disbursement after completing their internal restructuring.

And secondly, companies would have to borrow more from banks after using up their retained earnings.

If the efforts to revive the textile sector bear fruits—and chances are they would, there would be increased credit demand from textiles as well. Moreover, as the government is likely to offer incentives for encouraging exports in the non-conventional sectors, the borrowing appetite of these sectors would rise.

The State Bank has identified chemicals, agricultural products, seafood and fruits as the items whose growth potential in export is enormous.

It has also identified office and telecom equipment, machinery, automotive products and pharmaceuticals as other items whose export market is expanding fast.

In the next fiscal year, the private sector credit would likely increase also because the government is expected to reduce its bank borrowings and increase non-bank borrowing. The government will do this primarily to help the central bank achieve the inflation target of 6.7 per cent, after failing this year in keeping inflation within the target.

Courtesy by “Dawn”

 
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