Low interest rates to boost consumer finance business

Head of Retail Clients Shezad Arif at Standard Chartered Bank, in an interview, said banks are well-positioned to strengthen their retail banking business, particularly personal loan and auto finance, with the 42-year low interest rates.
Q: Analysts believe that low interest rate will give a rise to consumer spending. What do you think?
A: Yes, theoretically speaking a low interest rate regime will boost consumer spending. Eventually, the banks will pass on the drop in KIBOR (Karachi Interbank Offered Rate) – presently at 6.55 percent – to the consumers. With the CPI (consumer price index) inflation of 3.6 percent, down from 8.4 percent in August 2014, the stage is set for a consumption-driven economy, which will benefit the bank’s consumer finance books. Having said that, banks should remain cognizant of the target market which they are servicing to ensure the development of a sustainable balance sheet and consumer finance business.
Q: Banks disbursed Rs280 billion consumer loans in July 2015 as against Rs250 billion in July 2014. How do you foresee the growth trend in consumer finance?
A: The outlook for consumer finance is positive. As evidenced by a State Bank’s report, the momentum in consumer financing is present with a 12 percent year-on-year growth in July 2015 over July 2014.
Furthermore, the average monthly increase in disbursal volumes of banks (2015 to date) is 0.92 percent compared to 0.71 percent in the same period of 2014. So like I mentioned, the momentum is there, and we believe the growth trend will continue in a stable manner. It needs to be noted that the market has matured in terms of availability of credit bureaus, SBP (State Bank of Pakistan) consumer debt servicing caps and caps on loan amounts. Therefore, we do not expect an implosion in consumer financing like we saw during 2006.
Given the prudential framework, the momentum, which is present, will continue to build aiding the banks’ consumer finance books. Furthermore, banks will continue to leverage on technology and consumer servicing to increase their pie for market share which, in parallel, will be aided by initiatives being undertaken by SBP to increase the inclusion of consumers in the financial system.
Q: In your opinion, which segment of the consumer finance is more likely to thrive?
A: Given that interest rates are at a 42-year low, this is an opportune time for mortgage business to grow at a decent pace. Having said that, the SBP report reflects that majority of the growth has been fuelled by auto finance and personal loans where as credit card and housing loan growth has remained relatively flat. We expect this trend to continue, because banks are targeting a very niche segment of consumers for credit cards leading it to become a NFI- (non-funded income) driven business rather than revolving receivables and challenges on mortgage loans are well documented. Banks, which have an auto finance infrastructure in place will continue to build, whereas the simplicity and quick returns on personal loans should see it being the lead contributor for growth in consumer finance.
Q: Bankers say insufficient foreclosure laws are one of the major impediments to growth of housing finance sector. Do you agree?
A: Yes, we completely agree with this statement. In addition to the foreclosure laws, there is a lack of interest shown on part of the defending counsels while asking for undue adjournments and delays in recovery. Additionally, at times court proceedings are suspended for various reasons, coupled with prolonged litigation time frame.
Q: Is your bank planning to launch any new product in near-future?
A: Currently, we are working towards a product proposition that enables equity release for a business client, by availing fixed term financing against his property. Therefore, we will continue to look at enhancements within all products in our menu to ensure we stay abreast with the client’s needs.