KARACHI, Dec 7: Non-performing loans of consumer financing by banks in Pakistan touched an alarming level of Rs15.4 billion in September 2007 which is up from Rs6.4 billion in June 06.

This situation has forced a large number of banks to suspend sanctioning of personal and auto loans: the two segments which constitute almost 70 per cent of default loans in consumer financing.

As a consequence of this growing default, the share of non- performing loans of consumer financing increased to 9.5 per cent of the total bad loans of banks in September as compared to 3.3 per cent in June last year.

The State Bank of Pakistan has already asked banks to make full provision for bad loans in their annual balance sheets which bankers say is bound to impair their profitability in the current year.

Bankers say a slowdown in consumer financing is already visible. Bankers offered Rs23.30 billion consumer loans in the first four months of 2006-07 against which consumer financing in the same period of current fiscal year came down to Rs14.32 billion. A report by the State Bank reveals that within consumer financing, the highest share is of personal loans at 39 per cent, followed by 31 per cent car financing, 17 per cent house financing and 13 per cent credit cards.

In the first four months of 2007-08, banks recovered Rs1.95 billion as against sanctioning of Rs9.50 billion personal loans in the same period in the last fiscal year.

Banks have recovered Rs15 million loans given for purchase of durables this year. Last year too banks recovered Rs163 million extended for purchase of durables in the same period. But banks maintained a growth tempo in advancing loans for housing, car purchase and for credit cards in first four months which is now being slowed down and suspended in many banks.

“We are now applying high credit standards and seeking information of the borrowers from the State Bank of Pakistan’s Credit Information Bureau (CIB),’’ a banker disclosed.

Plight of banks at the hands of loan defaulters is proving to be a rich bonanza for the upcoming loan recovery companies that have scrambled out in all major cities to impound cars of loan defaulters and locate those who borrowed personal loans, housing credits, car purchase and obtained credit cards.

The formation of loan recovery companies is relatively a new phenomenon. A few companies, with corporate structure, are well-equipped with technology and computers and have countrywide reach. But most of the companies are formed by retired bank employees who have employed tough people to impound cars and force defaulters to pay back loans by sheer intimidation and force.

“We recovered 80 cars in a single month of October,’’ disclosed an official of such a company who is convinced that as many as 100,000 cars against loans are with the defaulters that need to be impounded. The recovery companies charge Rs15,000 to Rs20,000 for detecting and impounding a car against default loan depending on the model, make and age of the car and city and location. There are tariffs for recovering personal loans and credits borrowed for other consumption purposes.

Consumer loans were introduced initially by two foreign banks in the year 2000-01 for car purchase and housing. Later in the year 2001, a local privatised bank introduced consumer financing and in July 2002, the State Bank of Pakistan issued a circular that allowed all banks. Then a detailed comprehensive regulation package was also drawn up by the State Bank of Pakistan.

In the last five years, consumer financing showed an unprecedented phenomenal growth involving all big and small banks, leasing companies and even private stores of durables.

In June last year, the Pakistan Credit Rating Agency Limited in a review of banking sector — 2005 and beyond -- estimated the share of consumer financing in some banks to be 30 per cent of their total lending with plans to raise it to 50 per cent in future. At that time in 2005, the review did not notice “consumer financing has led to any material increase in non-performing loans. But it warned that the default pattern of other countries suggests that incidence of default increases in third year.

In September this year, the car financing reported default of Rs4.26 billion, credit cards Rs2.97 billion, mortgage loan Rs2.59 billion and other personal loans Rs5.13 billion.

In the beginning when consumer financing was introduced the Governor of State Bank and other functionaries of the government did not miss any opportunity to educate people on virtues of consumerism.

Instead of using bank funds to set up efficient and comfortable public transport companies in big and small cities, the emerging middle class was given generous bank loans and leasing funds to purchase cars which spiralled prices and car makers made unprecedented profits. No one then realised Pakistan is an oil importing country and roads in all cities are in a bad shape.

“No wonder then, more than 100,000 borrowers are now more interested in returning their cars to banks then clearing their loans,’’ a banker observed who said the wear and tear of automobiles in almost all cities of Pakistan is highest in Pakistan.

Electronic appliances purchased against loans are rendered useless within months if not weeks because of abrupt and frequent power breakdowns.