April 16, 2007
The debt-trapped consumers
By Sabihuddin Ghausi
RISING interest rates, spiralling service charges and a deterioration in quality of service are bringing down the demand for personal loans, credit cards and autos leasing. The unprecedented phenomenal growth of consumer banking over the past five years had opened new opportunities for banks and the business particularly in automobile, electronic goods and housing. But the growth in consumer banking is facing new challenges as a result of interest hikes.
Consumer financing picked up rapidly as interest rates plunged to record lows in 2000 and 2001. Cheap credit was also used for speculative trading in stock exchange, commodities and in real estate. The consumer financing also contributed to inflationary pressures, resulting, from 2005 onwards, in a tight monetary policy by the State Bank, pushing up the interest rates. This has made loans repayment expensive. The central and commercial bankers are apparently trapped in a difficult situation, with consumers unable to service debts..
In the last five years, consumer banking raised the numbers of borrowers of half a million rupees and less up to more than 425,000. The amount of small loans too increased by more than 100 per cent from Rs154 billion at end of December 2001. Now, the State Bank of Pakistan reports a drop in consumer loans. But what it does not report are the problems in recovery of the stuck up amounts.
A joint assessment report of Pakistan's banking sector by the World Bank and the International Monetary Fund (IMF) about a year ago noted the share of personal loans (particularly, auto loans, house loans and credit cards) has grown from virtually nothing in mid-1990s to 12 per cent of total bank credit in September 2003. ``The rapid consumer credit growth, if sustained, could lead to deterioration in banks' loans portfolio,'' the report had warned.
` `Bankers now find it difficult to recover Rs10 billion stuck up against 15,000 cars'', confided a senior banker. His bank, at one time was sanctioning Rs100-150 million loans every day to purchase cars, buy electronic goods, construct houses and for personal consumption. Recovery of home loans is also getting tough with soaring prices of construction inputs. Borrowers say that project developers have raised the cost by 20-25 per cent and banks have increased interest rates and levy exorbitant penalties and service charges.
The end result is that, bankers are resorting to unconventional methods for recovery of loans. Dozens of companies have been formed that work on commission basis for the national and foreign banks for the recovery of these loans. Borrowers are threatened and insulted in front of their neighbours and colleagues in the offices they work. There have been instances of high-handedness and defaulters rush to police stations to report against employees of such companies and the banks. Offices of President Musharraf, Prime Minister Shaukat Aziz, finance ministry and courts are flooded with complaints from all such borrowers and their family members who suffered.Human right organisations too have submitted petitions on this subject.
``Many banks are lacking in a sales and service culture and service standards leave much room for improvement'' was the candid observation of the first annual report of the Bankers' Ombudsman for the year 2005. The second report is due in next few days which will cover other aspects of services of banks and recommendations for a further improvement.
Bankers now expect the enforcement of a ``Fair Debt Collection Act'' on lines of a law enacted in USA about a decade ago when banks and financial institutions pursued such unconventional practices to recover the outstanding loans. Under this law, banks and financial institutions are not allowed to approach loan defaulters after sunset. Use of abusive and threatening language is an offence. Bank officials are barred from communicating with the close relatives of defaulters.
Borrowers have their own stories to tell. They blame banks of asking for the interest rates in their payment notices which are different than those given in the original agreement. Then there are penalties and service charges which were never a part of the original contract. ``After more than two years of use in Karachi, the condition of car does not match the amount of loan with interest'', an executive in an advertising g agency said who now wants the lender bank to take custody of his vehicle.
Credit card business too has its own problems. Banks have been blamed of charging penalties for late payment while card-holders claim that it was made within stipulated time. A senior citizen and a former editor of a national newspaper got his card blocked by the bank after he had used it for payment of hospital bill. Taking it as an affront, for not being given due notice, he cancelled the card after making full payment. The bank despatched him another card which he refused to accept. But then his difficulties began. He started getting a bill on the card that he had returned. It was after more than a seven months that the bank took notice of his complaint and endorsed his cancellation but with no apologies.
Then card issuers do not accept the liability of misuse of a card after it has been lost. They continue to hold the card holder responsible for all transactions till a lost report is lodged. The merchants are more interested in pushing up the sales and do not bother to match the signature of their customer with that on the card. So, the ultimate victim is the card-holder whose card is lost and the same is misused by some other person.
As the number of complaints of misuse of cards increased, the Ombudsman recommended the State Bank to instruct banks to issue PIN-based credit cards that would provide additional security. This recommendation should be implemented by the year 2008'', Azhar Hameed, the Bankers Ombudsman said.
The Bankers' Ombudsman detected parallel banking accounts in the banks. The unscrupulous staff maintains two set of books. It uses one set for its business and depositors' money is not credited to bank but in the personal business books. The amount is then transferred to top books of the banks at regular intervals after using depositors' money for the business.
The SBP has instructed banks to keep customer updated on his account statement by despatching him regularly a quarterly report at nominal cost. And that staff rotation in bank should be more frequent.
Notwithstanding, the slump in consumer financing and the problems of small borrowers, the 14 big banks have shown a fabulous profit of more than Rs60 billion in the year 2006. For the last five years banks have been showing huge profits every year, thanks to the banking reforms. Under these reforms, more than 35,000 employees have been laid off and more than 2,000 branches closed.
But in the year 2006, the profits of banks have come from the spread of 7.6 per cents, with the average weighted interest rate being offered to about 30 million savers much less than the prevailing inflation rate. The bank recovers an interest rate in double digit from borrowers. No wonder, the income of banks from interest on loans increased to Rs115 billion although the growth in loan amount was less than the previous years.
The SBP Governor Dr Shamshad Akhtar , in December 2006, said that depositors were getting a raw deal. She had warned of the SBP's intervention if banks' failed to compensate the depositors on their own.. Banks just ignored her.. After a month in January the Governor informed a press conference that banks were offering many attractive products and it was up to savers to select one for getting a good return. She was obviously referring to term deposits. Reports suggest that hardly 15-20 per cent of depositors have opened term deposit accounts on which rate of return is equal to rate of inflation. As much as 60 per cent of banks' funds carry no interest and about 15-20 per cent are with relatively low interest rate. In short, banks are doing business with money that does not carry any interest or it is very little.
Over the past 6-7 years, the banking business has been substantially de-regulated and banks have been given a free hand to determine their own service tariffs. The State Bank has just to be informed. Bank service charges have increased by more than 500 per cent in certain cases and have gone up by 100-150 per cent in most cases in the last seven years. No wonder, banks' non- interest income also went up by 29 per cent or Rs43 billion in 2006.
``Instead of doing a risk management business, banks are now a class of rent earners''. was a remark that sounded cynical but still a bitter truth. Banks are not ready to open accounts of low income group persons. In November 2005, the SBP asked the banks to open `basic banking accountâ for the low-income group. Under this scheme there is no condition of any minimum amount. Only two deposit and four withdrawal entries in a month are allowed. No service charge is levied on despatch of an annual statement. Banks were asked to report compliance by February 2006. Only a few banks have reported compliance but there was no response from the SBP as to how many banks abide by the instruction.
http://www.dawn.com/2007/04/16/ebr1.htm
The debt-trapped consumers
By Sabihuddin Ghausi
RISING interest rates, spiralling service charges and a deterioration in quality of service are bringing down the demand for personal loans, credit cards and autos leasing. The unprecedented phenomenal growth of consumer banking over the past five years had opened new opportunities for banks and the business particularly in automobile, electronic goods and housing. But the growth in consumer banking is facing new challenges as a result of interest hikes.
Consumer financing picked up rapidly as interest rates plunged to record lows in 2000 and 2001. Cheap credit was also used for speculative trading in stock exchange, commodities and in real estate. The consumer financing also contributed to inflationary pressures, resulting, from 2005 onwards, in a tight monetary policy by the State Bank, pushing up the interest rates. This has made loans repayment expensive. The central and commercial bankers are apparently trapped in a difficult situation, with consumers unable to service debts..
In the last five years, consumer banking raised the numbers of borrowers of half a million rupees and less up to more than 425,000. The amount of small loans too increased by more than 100 per cent from Rs154 billion at end of December 2001. Now, the State Bank of Pakistan reports a drop in consumer loans. But what it does not report are the problems in recovery of the stuck up amounts.
A joint assessment report of Pakistan's banking sector by the World Bank and the International Monetary Fund (IMF) about a year ago noted the share of personal loans (particularly, auto loans, house loans and credit cards) has grown from virtually nothing in mid-1990s to 12 per cent of total bank credit in September 2003. ``The rapid consumer credit growth, if sustained, could lead to deterioration in banks' loans portfolio,'' the report had warned.
` `Bankers now find it difficult to recover Rs10 billion stuck up against 15,000 cars'', confided a senior banker. His bank, at one time was sanctioning Rs100-150 million loans every day to purchase cars, buy electronic goods, construct houses and for personal consumption. Recovery of home loans is also getting tough with soaring prices of construction inputs. Borrowers say that project developers have raised the cost by 20-25 per cent and banks have increased interest rates and levy exorbitant penalties and service charges.
The end result is that, bankers are resorting to unconventional methods for recovery of loans. Dozens of companies have been formed that work on commission basis for the national and foreign banks for the recovery of these loans. Borrowers are threatened and insulted in front of their neighbours and colleagues in the offices they work. There have been instances of high-handedness and defaulters rush to police stations to report against employees of such companies and the banks. Offices of President Musharraf, Prime Minister Shaukat Aziz, finance ministry and courts are flooded with complaints from all such borrowers and their family members who suffered.Human right organisations too have submitted petitions on this subject.
``Many banks are lacking in a sales and service culture and service standards leave much room for improvement'' was the candid observation of the first annual report of the Bankers' Ombudsman for the year 2005. The second report is due in next few days which will cover other aspects of services of banks and recommendations for a further improvement.
Bankers now expect the enforcement of a ``Fair Debt Collection Act'' on lines of a law enacted in USA about a decade ago when banks and financial institutions pursued such unconventional practices to recover the outstanding loans. Under this law, banks and financial institutions are not allowed to approach loan defaulters after sunset. Use of abusive and threatening language is an offence. Bank officials are barred from communicating with the close relatives of defaulters.
Borrowers have their own stories to tell. They blame banks of asking for the interest rates in their payment notices which are different than those given in the original agreement. Then there are penalties and service charges which were never a part of the original contract. ``After more than two years of use in Karachi, the condition of car does not match the amount of loan with interest'', an executive in an advertising g agency said who now wants the lender bank to take custody of his vehicle.
Credit card business too has its own problems. Banks have been blamed of charging penalties for late payment while card-holders claim that it was made within stipulated time. A senior citizen and a former editor of a national newspaper got his card blocked by the bank after he had used it for payment of hospital bill. Taking it as an affront, for not being given due notice, he cancelled the card after making full payment. The bank despatched him another card which he refused to accept. But then his difficulties began. He started getting a bill on the card that he had returned. It was after more than a seven months that the bank took notice of his complaint and endorsed his cancellation but with no apologies.
Then card issuers do not accept the liability of misuse of a card after it has been lost. They continue to hold the card holder responsible for all transactions till a lost report is lodged. The merchants are more interested in pushing up the sales and do not bother to match the signature of their customer with that on the card. So, the ultimate victim is the card-holder whose card is lost and the same is misused by some other person.
As the number of complaints of misuse of cards increased, the Ombudsman recommended the State Bank to instruct banks to issue PIN-based credit cards that would provide additional security. This recommendation should be implemented by the year 2008'', Azhar Hameed, the Bankers Ombudsman said.
The Bankers' Ombudsman detected parallel banking accounts in the banks. The unscrupulous staff maintains two set of books. It uses one set for its business and depositors' money is not credited to bank but in the personal business books. The amount is then transferred to top books of the banks at regular intervals after using depositors' money for the business.
The SBP has instructed banks to keep customer updated on his account statement by despatching him regularly a quarterly report at nominal cost. And that staff rotation in bank should be more frequent.
Notwithstanding, the slump in consumer financing and the problems of small borrowers, the 14 big banks have shown a fabulous profit of more than Rs60 billion in the year 2006. For the last five years banks have been showing huge profits every year, thanks to the banking reforms. Under these reforms, more than 35,000 employees have been laid off and more than 2,000 branches closed.
But in the year 2006, the profits of banks have come from the spread of 7.6 per cents, with the average weighted interest rate being offered to about 30 million savers much less than the prevailing inflation rate. The bank recovers an interest rate in double digit from borrowers. No wonder, the income of banks from interest on loans increased to Rs115 billion although the growth in loan amount was less than the previous years.
The SBP Governor Dr Shamshad Akhtar , in December 2006, said that depositors were getting a raw deal. She had warned of the SBP's intervention if banks' failed to compensate the depositors on their own.. Banks just ignored her.. After a month in January the Governor informed a press conference that banks were offering many attractive products and it was up to savers to select one for getting a good return. She was obviously referring to term deposits. Reports suggest that hardly 15-20 per cent of depositors have opened term deposit accounts on which rate of return is equal to rate of inflation. As much as 60 per cent of banks' funds carry no interest and about 15-20 per cent are with relatively low interest rate. In short, banks are doing business with money that does not carry any interest or it is very little.
Over the past 6-7 years, the banking business has been substantially de-regulated and banks have been given a free hand to determine their own service tariffs. The State Bank has just to be informed. Bank service charges have increased by more than 500 per cent in certain cases and have gone up by 100-150 per cent in most cases in the last seven years. No wonder, banks' non- interest income also went up by 29 per cent or Rs43 billion in 2006.
``Instead of doing a risk management business, banks are now a class of rent earners''. was a remark that sounded cynical but still a bitter truth. Banks are not ready to open accounts of low income group persons. In November 2005, the SBP asked the banks to open `basic banking accountâ for the low-income group. Under this scheme there is no condition of any minimum amount. Only two deposit and four withdrawal entries in a month are allowed. No service charge is levied on despatch of an annual statement. Banks were asked to report compliance by February 2006. Only a few banks have reported compliance but there was no response from the SBP as to how many banks abide by the instruction.
http://www.dawn.com/2007/04/16/ebr1.htm
