When interest rates rise, consumer financing is the first to fall. And this happens more frequently in economies where, unlike the corporate borrowers, consumer finance seekers cannot afford to service pricier loans.

On the other hand, after a huge increase in interest rates, bankers also put consumer loans on a stricter watch to avoid delayed — or in the worst case — no servicing of such loans.

This twin phenomenon becomes all the more inevitable if interest rate hiking coincides with a declining trend in economic growth.

Keeping this in mind we can anticipate a declining trend in the growth of consumer finance from the April-June quarter — or the beginning of the new fiscal year in July — if higher interest rates start affecting consumer loan demand with a lag of time. That trend may last till the time the economic growth picks up further pace — and, in particular, leads to a rise in the net real income of people — or interest rates become stable for a quarter or two. Or both things happen at the same time paving the way for some monetary easing.

Till economic growth picks up and enables net real income to rise and/or interest rates become stable for a quarter of two, we can anticipate a declining trend in the growth of loans

During the last fiscal year (July 2020-June 2021), Pakistan’s economy grew 5.3 per cent and consumer financing remained robust. During the current fiscal year due to end in June, the economy is projected to grow somewhere between 4pc (International Monetary Fund projection) and 4.3pc (World Bank projection). So far this year, consumer financing growth has remained in double digits but the sign of deceleration is obvious.

In the entire FY21, consumer financing grew 32.6pc or by Rs174 billion, State Bank of Pakistan (SBP) stats reveal. In nine months of FY22 (July 2021 to March 2022), the rate of growth slipped to 20.2pc. However, volume-wise Rs143bn worth of new consumer loans were made during this period. Full FY22 consumer financing is expected to reach the previous year’s level of Rs174bn but the rate of growth would obviously be lower because of a larger base.

After 7th April’s 250 basis points increase in the SBP policy rate — from 9.75pc to 12.25pc — all banks have accordingly repriced their consumer loans using the most frequently used six-month Karachi Interbank Offered Rate (Kibor) as the benchmark.

A leading bank recently put out ads in the top newspapers informing intending car purchasers that car financing is now available at six-month Kibor plus 2.99pc plus 1.99pc Islamic insurance or Takaful. Six-month Kibor is 14.87pc (as of May 9). Add to it 2.99pc and you get 17.86pc. Now add to it another 1.99pc and you get 19.85pc. This means car purchasers will have to pay close to 20pc interest (excluding other ancillary charges) per annum.

Effective interest rates on most credit cards have risen past 20& per annum

At this high-interest rate, car financing by banks can be expected to slow down from this quarter — or in the best-case scenario from the July-September quarter. In March 2022, car sales in Pakistan had increased 25pc to 27,131 units from 21,664 units in February, according to Pakistan Automotive Manufacturers Association. Cumulatively from July 2021 to March 2022, car sales have grown 52pc to 205,381, compared to 134,718 from July 2020 to March 2021 (when Covid-19 triggered restrictions on movement and lockdowns were in place).

Such massive growth in car sales is bound to decelerate both due to higher interest rates as well as due to the large base effect.

Consumer financing for house building that was only picking pace during the last fiscal year, gathered full steam during this year — thanks to PTI’s policy of extending tax amnesty to builders. In nine months of FY22, banks offered more than Rs66bn worth of new housing loans to consumers whereas, in the same period of FY21, they had lent only Rs13bn, SBP stats reveal. From the April-June quarter, however, housing loans have also become costlier and banks have also become more prudent in the processing of such loans after the change of the government.

Consumer financing for house building is also expected to decelerate because, during the ongoing loan negotiations with the IMF, the Fund has insisted upon Pakistan ending the tax amnesty scheme for builders.

Consumer borrowing from banks through credit cards is the most popular mode of consumer financing. And, it reflects the changes in interest rates almost instantly. After the 7th of April’s massive interest rate tightening, effective interest rates on most credit cards have risen past 20pc per annum. But whether this will lead to a substantial fall in the growth rate of credit card financing cannot be predicted.

Since banks and chains of retail businesses have, over the years, built strong networks, eateries, pharmacies and clothing brands offer a range of discounts on purchases through specific credit cards. This incentive is significant for most users of credit cards and may keep demand for these cards falling too abruptly.

Also, the greater digitisation of bank accounts is supporting the wider use of credit cards. In nine months of this fiscal year, banks provided Rs14bn credit card financing against that of Rs10bn in the same period of the last year.

Personal loans may, however, be hit hard by the higher interest rates. These loans are obtained by people mostly for making up for the shortfall in their incomes and an increase in the interest rate immediately discourages people to get such loans. They look for other ways of supplementing their income dreading a default on bank loans.

So, the growth of personal loans that already weakened in nine months of this fiscal year should weaken further amidst rising interest rates. (During July-March FY22 banks made only Rs6bn net additional personal loans against Rs37bn in July-March FY21).

Published in Dawn, The Business and Finance Weekly, May 16th, 2022