Visible reduction in consumer finance

After enjoying considerable popularity over the last few years, consumer financing by banks appears to be on the wane. According to the data released by the State Bank of Pakistan (SBP) on 26th July, overall consumer financing plunged by Rs 50 billion or 17 percent, to Rs 224 billion at the end of June, 2010 as compared to Rs 294 billion a year earlier.
Every segment of consumer financing witnessed a decline during 2009-10. Outstanding loans, under the credit card business, shrank to Rs 28 billion from Rs 35 billion during the previous year. A low quality performance of banks in case of credit cards was believed to be the main hurdle in the promotion of plastic money and a report recently issued by the Banking Ombudsman revealed that the highest number of complaints submitted to it were against this business of banks.
Car purchasing was the next highest attraction for consumers, but outstanding loans under this head also declined to Rs 64 billion by the close of June, 2010 as against Rs 78 billion a year earlier and Rs 105 billion at the end of June, 2008. The stock of personal loans was reduced to Rs 94 billion from Rs 115 billion in June 2009 and Rs 140 billion in June, 2008. Loans under consumer durables dropped almost by half from Rs 420 million in June, 2009 to only Rs 211 million by June, 2010, while advances for house building, under consumer financing, also declined from Rs 61 billion to Rs 54.5 billion in the same period.
A sharp decline in consumer finance in the recent past could be attributed to a number of factors. Obviously, the State Bank had to implement a stringent monetary policy to contain inflationary pressures on the economy and since both the government and external sectors were expansionary, the axe had to fall on private sector credit to maintain money supply growth within reasonable limits. The fact that banks chose to reduce the level of consumer finance in this situation in order to accommodate the requirements for productive credit, in our view, was a wise move, which was in the long-term interests of the economy. Restrictive behaviour of the banks, in respect of consumer finance, was also totally in line with the general change in the mind of consumers who, in the meantime, had become wary about the sly practices of the financial institutions in this particular field of business.
In most of the cases, they were not thoroughly informed about the terms of consumer loans and were harassed, often times, for the recovery of loans. A facility that was touted as a kind of blessing, therefore, turned to be a cause of misery in most of the cases.
Anyhow, the recent unpopularity of consumer finance could turn out to be a positive development for all the stakeholders, including the banks, the borrowers and the economy as a whole. While banks may shed their image of being shylocks and improve their overall recovery rate, consumers' temptation to borrow from the banks and purchase durables to keep up with the jones may also recede to match their consumption behaviour with their future income streams. Productive capacity of the economy could increase through diversion of resources from consumption to investment. Besides, import demand for consumer goods would decline and inflationary pressures in the economy could recede somewhat due to preference of savings over consumption.
However, it needs to be remembered that such hypothesis applies only to our present situation, where consumption, at all levels, needs to be discouraged. Hopefully, a stage may come, after a few years, when a larger part of credit may have to be diverted for consumer finance in order to keep the wheels of the economy moving. Also, the present classification of loans needs to be appropriate to support our contention. There are reports that loans obtained by farmers to increase the crop yields are also categorised as consumer financing in several cases due to certain factors. Such a flawed classification would invariably lead to inappropriate conclusions.