They say the cue for domestic banks to start lending aggressively comes invariably from foreign banks.
The statement may be exaggerated, but the underlying assumption sounds right: a well-established foreign bank in a developing economy helps determine the overall mood in its banking sector and beyond. When foreign banks grow their loan books, domestic banks follow suit. When foreign banks cut back on advances, domestic banks become conservative, too.
So what does it mean when Standard Chartered Pakistan, one of the oldest banks operating in the region with a western pedigree, says it is going to substantially scale up its footprint in retail banking in the next six months? Its plan to focus on retail banking is intriguing given that Standard Chartered has traditionally been a trade-oriented bank.
In a media roundtable at the Standard Chartered Pakistan headquarters on Wednesday, executives from its retail segment told journalists that consumer banking is finally gathering pace in Pakistan and Standard Chartered is not going to sit this one out.
While some observers will brush aside the media briefing as a publicity stunt, one should not lose sight of the fact that Standard Chartered is the country’s sixth largest commercial bank in terms of operating profits.
“Industry-wide data on consumer banking is showing signs of improvement. From mortgage to auto loans, statistics point to a gradual improvement,” said Shezad Arif, head of retail clients, while speaking on the occasion.
Official data clearly reflects the upswing in consumer loans that Arif referred to. After all, the benchmark interest rate is at a record-low level of 6%, which makes borrowing cheap as well as enticing for consumers.
Supply of loans
On the supply side, the asset-to-deposit ratio of the banking industry is hovering around 45%, meaning banks are sitting on piles of deposits that can well be used to fuel consumer spending. No wonder banks seem to be increasingly enthusiastic about growing their consumer loan portfolio.
While the loans extended by banks to private-sector businesses went up only 5.7% in the 12 months to August 2015, the corresponding surge in banks’ consumer financing clocked up at 9.3%.
Outstanding loans for house building increased 7.9% on an annual basis while financing for the purchase of cars surged a whopping 34% over the 12-month period.
So how have the banks become suddenly cognisant of their retail clients’ need for borrowing? After all, banks had massively scaled down their consumer financing portfolio in the wake of the financial slowdown in 2008.
Making hay while the sun shone, banks were on a lending spree in the 2000s. They gave away credit cards and financed car purchases as if there was no tomorrow. The result was a ballooning of outstanding consumer financing, as it reached Rs371 billion in January 2008 – a mark the banking industry still falls short of by Rs92 billion seven years on.
Financial slowdown hit and people failed to make their credit card and car loan payments. The situation became so worse that bank CEOs would receive calls during live TV shows from dejected customers, asking for a downward revision in the interest rate on their outstanding loans.
As a result, the banking sector became extremely conservative about consumer financing in the following years. While the benchmark interest rate increased, banks cut back on auto financing and, in some cases, almost did away with mortgage operations.
The ultimate outcome was a consistent drop in consumer financing for the next four years and nine months, as it shrank to Rs202.5 billion in October 2012.
Are we going to see a replay of the credit bubble and its subsequent burst then?
“This time will be different,” says Arif, referring to the formation of the centralised Credit Information Bureau.
Of course, interest rate volatility remains a concern, he says. “But an improving security situation is going to attract foreign investment, which will bring long-term economic stability,” Arif added optimistically.
Published in The Express Tribune, October 23rd, 2015.
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