DECREASE IN CONSUMER FINANCE LIKELY TO IMPACT INDUSTRIAL

UNCLAS SECTION 01 OF 02 ISLAMABAD 003104

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PREL PK
SUBJECT: DECREASE IN CONSUMER FINANCE LIKELY TO IMPACT INDUSTRIAL
PRODUCTION

Summary
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1. (SBU) Growth in consumer financing slowed in FY07-08 compared to
FY06-07, due to rapidly increasing food and energy costs, coupled
with stagnant incomes. These have eroded consumers' ability to pay
large loan installments, thereby reducing the demand for new
lending. Banking executives report to local media they are confident
the consumer finance market will revive once the political situation
stabilizes, inflation is brought under control, and the cost of
credit is reduced. However, with banks becoming more cautious and
consumers more reluctant to borrow, demand is likely to decrease,
and lower demand, coupled with higher costs of production, could
result in decreased industrial production. End Summary.

Decreasing Consumer Financing
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2. (SBU) Consumer finance, including personal loans, mortgages and
credit cards, grew by 3 percent in FY 07-08, down from 17 percent
growth in FY06-07. In absolute terms, the value of outstanding
commercial loans grew by PKR 11 billion (USD 144.7 million) during
the previous fiscal year, versus PKR 51 billion (USD 671 million) in
the FY06-07. Pakistan's total stock of consumer loans currently
stands at PKR 359 billion (USD 4.72 billion). Banking executives
reported to local media that the slowdown in consumer finance is due
mainly to a rise in the cost of borrowing. The State Bank of
Pakistan (SBP) discount rate is currently 13 percent and has been
increased four times in the last 14 months. Local commercial banks
are reportedly more cautious in approving consumer loans and are
actively targeting clients with good credit histories for future
business.

Mortgage Lending Increases; Personal and Car Loans Decrease
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3. (SBU) The share of personal loans in overall consumer loans
dropped to just below 39 percent in FY07-08, from close to 41
percent in FY06-07: PKR 140 billion (USD 1.8421 billion) in FY07-08
from PKR 142 billion (USD 1.8684 billion) in FY06-07. Car loans
dipped slightly to PKR 104.99 billion (USD 1.381 billion) from PKR
105.44 billion (USD 1.387 billion),with the percentage of car loans
in total consumer loans dropping to 29 percent from over 30 percent.
Mortgage loans in FY07-08 rose to PKR 66.55 billion (USD 875.7
million) from PKR 54.67 billion (USD 719.3 million) in FY06-07, with
the share of mortgage loans in outstanding consumer loans increasing
to 18.5 percent from 15.69 percent. Credit card loans climbed
modestly to PKR 44.45 billion (USD 584.9 million) from PKR 42.82
billion (USD 563.4 million) - its share of total consumer loans
increasing in FY07-08 to 12.4 percent, as compared to 12.2 percent
in FY06-07.

State Bank Says Consumer Financing Still Strong
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4. (SBU) Rapidly increasing food and energy prices, coupled with
stagnant incomes, eroded consumer ability to pay large loan
installments, thereby reducing the demand for new lending. However,
the State Bank of Pakistan (SBP) said in its FY07-08 third quarter
report that the overall quality of the consumer finance had been
good, although it had started weakening somewhat in 2006. It noted
that, "as compared to other sectors, consumer finance has so far
shown a very low level of non-performing loans". The SBP reports
that Pakistan's 14 percent share of consumer credit in total private
sector credit is still low compared to India, with 24 percent, and
Indonesia, with 30 percent.

Banking Executives Predict Consumer Financing Rebound
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5. (SBU) Banking executives report to local media that they believe
the current slowdown in the consumer finance market will rebound
once Pakistan becomes more politically stabile, inflation is brought
under control, and the cost of credit decreases. They note that the
consumer credit market in Pakistan still remains very small but has
great potential to grow and drive the overall economic development
of the country. Since mortgage and auto loans are adequately
secured, rising exposure in these areas may not pose serious credit
risk to banks, but the high level of unsecured lending - personal

ISLAMABAD 00003104 002 OF 002


loans and credit cards -
may warrant attention.

Comment
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6. (SBU) Until recently, much of the growth in the manufacturing
sector, particularly in the manufacturing of automobiles,
electronics, and consumer durables, has been led by higher consumer
demand spurred on by increased consumer lending. The steep fall in
consumer financing growth contributed to a slowdown in many parts of
the manufacturing sector in FY07-08. Many economists have
questioned the GOP policy of pushing consumption-led growth and have
warned of heavy defaults as personal indebtedness and the cost of
credit increase; consumer income remains stagnant. With banks
becoming more cautious and consumers becoming more reluctant to
borrow, demand for consumer financing is likely to continue to
decrease. In the current fiscal year, this decreased demand for
consumer financing coupled with higher costs of production, could
further slow manufacturing growth, which currently stands at 3.7
percent. End Comment.

PATTERSON