Home / Finance & Market / Lower interest rates spur consumer finance business

Lower interest rates spur consumer finance business

Published on 7th Mar, Edition 10- 2016

 

Auto financing set to grow up after the positive outlook of economy

The main advantage of low interest rates is their growth effect on economic activity. By reducing interest rates, the Central Bank helped increase business spending on capital goods. The reduction also helps economy’s long-term performance and increase household expenditures on homes/consumer durables.

Low interest rates raise asset prices. People use excess balances to increase their purchases of goods and services and of assets like houses or corporate equities. Increased demand for these assets, raises their price. On the other hand, low interest rates encourage borrowing and higher debt levels.

Low short-term interest rates reduces the profitability of money market funds, which are key providers of short-term credit for many large firms. It stimulates economic growth. Lower financing costs encourage borrowing and investing.

The State Bank of Pakistan uses its target rate as a monetary policy tool. If the State Bank reduces the base interest rate, it will usually cause commercial banks to reduce their own interest rates. It is observed that when interest rates are decreased, real estate sector activities pick up. This can be seen from the fact that real estate sector is immensely increasing particularly in Karachi.

Billionaire Malik Riaz is constructing Pakistan’s tallest skyscraper, a 62-floor tower and complex of offices, luxury flats and malls with Arabian Sea view. 80 percent of the apartments had been bought, with prices of Rs30,000 ($287) per square foot well above the average for high-end Karachi flats. Developers launched 134 residential and commercial projects in Karachi last year, up from 106 in 2014 and 72 in 2013.

Another reason in Pakistan is that most people just save their money in banks to get monthly profits. This is seen among retired personnel. Due to the low interest rates, investors get low profits on the deposited money. Therefore, they withdraw money from banks and invest in businesses and real estate sector. The State Bank of Pakistan has lowered its key interest rate at a time when the federal government has decided to implement growth-oriented economic policies. The industrialists and businessmen have long been demanding the central bank to set the interest rate below 8 percent aimed at reducing their cost of business. The reduction in the policy rate, definitely promote business activities in the country and reduce the input cost. But there are other factors to be taken like availability of gas and electricity that also affect industrial growth.

The benchmark interest rate in Pakistan was last recorded at 6 percent. Interest rate in Pakistan averaged 11.8 percent from 1992 until 2015, reaching an all-time high of 19.5 percent in October of 1996 and a record low of 6 percent in September of 2015.

Low interest rate boost consumer spending. With the CPI (consumer price index) inflation low the stage in Pakistan is set for a consumption-driven economy.

Banks are well-placed to strengthen their retail banking business, particularly personal loan and auto finance, with the 43-year low interest rates.

The outlook for consumer finance is constructive. As evidenced by a State Bank’s report, the momentum in consumer financing is at present with a 12 percent year-on-year growth in July 2015 over July 2014.

Given that interest rates are at a 43-year low, this is a favourable time for mortgage business to grow at a reasonable pace. The SBP report reflects that majority of the growth has been filled by auto finance and personal loans.

 

Landmark year for auto finance

Industrial growth in any country is not possible until and unless the credit is made available to the general public. To ensure the expansion of loans in the economy, a policy of reduction in interest rate plays a pivotal role.

State Bank of Pakistan has directed all the commercial banks to extend the loan size to small and medium sized businesses, which is very important for the economic development. In the recent years, State bank of Pakistan has lower down the interest rate for the banks.

Due to this downward trend in oil prices and inflation rate, the current account deficit and interest rate of banks have also been reduced in recent couple of years. Today record lowest point of interest rate is observed.

The downward of interest rates motivate people to invest more in business activities. More business means more constructive activities and more opportunities to be produced for the growth and development of SMEs. With the lowest level of interest rate in 42 years and improving economic indicators, fiscal year 2015-16 is expected to be a landmark year for auto finance as outstanding position of loans for the purchase of vehicles. Low interest rate makes it easy of auto lending. Auto financing rose to Rs93.5 billion in November 2015, the highest in last seven years. This is due to cheap credit and rising demand for both new and used cars.

The SBP reported Rs57 billion auto financing in January 2014 and Rs45.6 billion in January 2013. Auto financing saw a boom period in 2006-07 as its share reached 70 percent in total car sales. It appears that auto financing is set to repeat the record because of high demand and better economic and security conditions.

After reduction in interest rates, car financing positively affected the sales of automobiles. Auto financing is contributing around 35 percent of vehicle sales.

The share was 20 to 22 percent last year. The demand for automobiles is likely to accelerate this year if economic indicators improve further, and auto financing would be a key driver of the industry’s growth.

It is hoped that the new auto policy would be a step forward to promote Pakistani made cars vision so that industry can fascinate reliable new investors and provide greater choices to customers. It would also help improve Pakistan’s economy by triggering manufacturing segment, creating thousands of jobs in the auto and allied industry.

An analyst at a brokerage house said auto financing would grow in the coming months as the automobile industry stands to profit from the improved macroeconomic indicators and banks’ appetite to lend.

The rich middle class segment is expected to be the prime beneficiary of increased access to credit, as the buyer who was otherwise left out of the market can now be exploited.

Pakistan Suzuki Motor Company (PSMC) is well placed to benefit from the positive outlook for the economy, favourable Japanese yen trend and the enhanced share of auto finance.

Raising investor confidence, large construction activity, uninterrupted strengthening of the banking system, and the recent monetary easing are anticipated to positively impact credit rise in the coming months

These satisfactory developments in our country predict well for the calm transmission of policy rate changes to other market interest rates in addition to the enactment of the revised interest rate corridor frame.

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