Enormous challenge.

Byline: SYED WAQAR SAMI

Rising interest rates under consumer financing remain the daunting task

Personal loans have become an important source of meeting our financial commitments. Be they for acquiring consumer durables to enrich our lives, meet educational needs, marriage, vacation or meet urgent medical needs, consumer loans are being used by millions of Pakistanis in some form or the other. Consumer loans can be broadly classified into two categories:-

Running finance: The borrower is given an overdraft limit in his/her account and the markup is charged only on the utilized portion and only for the number of days the loan is outstanding. Multiple debits are allowed in the account.

Demand finance: The borrower is given the full limit in one go and is monthly amortized. No further disbursements are allowed and markup is charged on the diminishing balance method.

Presently the total consumer loan portfolio is 1.1 trillion as of Jan 231. This portfolio has doubled over the last 10 years as prices of consumer goods and property began to rise at an exponential rate in that period.

Consumer loans remain a very viable option for consumer banks due to their markup rates and low probability of default. Normally where a SME or a commercial borrower may be charged KIBOR + 1, the consumer may be charged K+3 or even more. Furthermore, the trouble with business loans is that once a loan gets bad, millions get affected and the recovery actions may take years, however, with consumer loans the type of security is liquid enough to be sold easily with little effort. Additionally, within consumer loans domino effect does not qualify as the ticket size is very small.

In retrospect, the consumer loan sector in Pakistan began to gain momentum in the 90s with the influx of foreign banks entering the Pakistani market and introducing products like credit cards, providing durable goods financing and personal loans to salaried individuals. Later on due to the high default percentage the banking watchdog i.e. the State Bank of Pakistan developed a department called the Credit Information Bureau, their primary task was to keep a borrower-wise record of all loans availed by anyone at any bank across Pakistan.

To further safeguard the interest of the depositors, SBP made it mandatory for all banks to upload the outstanding position of the loans disbursed by them on a monthly basis on a portal developed by the CIB. Presently it has become a mandatory requirement for any...