KARACHI: Lower interest rates have led to consumer loans picking up pace, with banks recording disbursements of over Rs 70 billion (Rs 7000 crores) in fresh consumer loans during last fiscal year (FY 17). According to a report published by State Bank of Pakistan, the prevalent low interest rate has led banks to strategise their lending by taking higher risk sectors that promise higher returns and consumer financing appears to be a dominant choice.
According to the SBP report, consumer loans registered an increase with Rs 70.5 billion in disbursed loans in FY 17 compared to Rs 43.7 billion in FY 16. The disbursed amount represents an approximate increase of 61 percent or Rs 26.8 billion in disbursed loans compared to the previous year.
A large proportion of loans approved have been diverted into auto financing, which held 54.3 percent share in consumer financing during FY17. Another major factor that accounted for flow of funds into auto financing was the introduction of new models of passenger cars and several ride-hailing services gaining momentum leading to an increase in auto-financing loans. The rest of the increase in consumer lending is accounted for by personal and housing loans acqusition, which also registered an increase by Rs 14.2 billion and Rs 12.5 billion, respectively.
From the institutional perspective, the rise in consumer financing is driven my Islamic Banking Institutions (IBIs), especially in the areas of housing and car financing. In case of car financing, the share of IBIs rose to 43.1 percent at end FY17.
The proportion of IBI’s in housing finance is even more pronounced contributing 60.9 percent share in the overall portfolio of the banking industry. The majority of housing finance was disbursed for outright purchase, followed by construction, and then renovation. The pattern holds true for both Islamic and conventional loans.
The report also concluded that in the case of housing finance, a weak valuation mechanism for real estate and legal restrictions encountered by commercial banks in exercising their right to collateral has been been a prominent restrictive factor in Pakistan.
Recent amendments to Financial Institutions (Recovery of Finances) Ordinance will ensure collateral foreclosure for banks without recourse to courts, the report said. This will save banks time and resources to take possession of and sell collateralised properties upon borrowers default.
The SBP is hopeful that such amendments will boost availability of credit to households, especially mortgage loans. Further support to domestic mortgage financing would be provided by the Pakistan Mortgage Refinancing Company (PMRC), which is expected to become operational in 2017.
