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RETAIL BANKING
CONSUMER BANKING I

SYED FAZAL AZIZ

CONSUMER BANKING --I

CONSUMER BANKINGI

What is Consumer Banking?

Bank means a banking company as defined

in the Banking Companies Ordinance, 1962.

Borrower means an individual to whom a

bank I DFI has allowed any consumer
financing during the course of business.

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Consumer Financing means any financing allowed

to individuals for meeting their personal, family or
household needs. The facilities categorized as
Consumer Financing are given as under:

Credit Cards mean cards which allow a customer to make

payments on credit. Supplementary credit cards shall be
considered part of the principal borrower for the purposes
of these regulations. Corporate Cards will not fall under this
category and shall be regulated by Prudential Regulations
for Corporate ! Commercial Banking or Prudential
Regulations for SMEs Financing as the case may be. The
regulations for credit cards shall also be applicable on
charge cards, debit cards, stored value cards and BTF
(Balance Transfer Facility).

CONSUMER BANKING --I

Auto Loans mean the loans to purchase the vehicle for

personal use.

Housing Finance means loan provided to individuals for

the purchase of residential house I apartment I land. The
loans availed for the purpose of making improvements in
house I apartment I land shall also fall under this
category.

Personal Loans mean the loans to individuals for the

payment of goods. services and expenses and include
Running Finance I Revolving Credit to individuals.

CONSUMER BANKING --I

In a generic sense, institutional arrangements that

provide consumers with financing support to
enhance their consumption and, as a result thereof,
improve their standards of living, fall within the broad
definition of Consumer Finance.

These range from Credit Cards, to finance and

operating leases, to housing finance. But the
semantics of financial markets generally exclude
housing finance from this range treating it as a
distinct financing product essentially because of its
long-term nature.

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Consumer finance spurs demand and consumption

that are necessary for the industry to expand its
productive capacity or make fuller use of its existing
capacity, and succeed in cutting prices at the retail
level.

It offers the prospects of increasing employment

and, possibly, fresh investment in industrial sectors,
especially those manufacturing consumer durable.

The key to sustaining the consumption- demand

equation without pushing inflation to unsustainable
levels is maintenance of the critical balance between
savings, investment and borrowers' debt-servicing
ability.

CONSUMER BANKING --I

In many countries, while the financial services sector

aggressively
undertook
consumer
financing,
maintaining this critical balance was often not
pursued as vigorously as should have been the
case, leading to over burdening of the
manufacturing sector and households with credit
that they eventually found hard to repay.

The excess liquidity in banks due to high inflow of

remittances in the 9111 aftermath stimulated the
banks to get into this business. Since then, it has
swelled at an unprecedented growth rate.

CONSUMER BANKING --I

PAKISTAN AND CONSUMER BANKING

AND ITS IMPACT ON ECONOMY:

Retail banks with large branch networks have the potential for
succeeding in this business but it will require making alterations
in their infrastructure and bring about a visible change in the
focus on investigative effort for risk assessment. The
organizational setup must be pro-active and sufficient in terms of
manpower and Management Information Systems to ensure a
reaction speed that is commensurate with the need for taking
timely action and the size of the customer base. In this regard it
will be crucially important to ensure that administrative resources
are matched with the size of the customer be on a continuing
basis.

From the macroeconomic standpoint, consumer financing has

significantly contributed to economic turnaround of Pakistan by
stimulating consumption and investments.

CONSUMER BANKING --I

There has been a phenomenal increase in private consumptions

due to easy availability of credit from banks.

However, in tandem with this development, the manner in which

consumer financing is being delivered has seriously jeopardized
the competitiveness in economy.

The most important issue is that Pakistan has one of the highest
interest rate spread in the world.

An analysis of the interest rate behavior in Pakistan reveals that

the spread has vacillated between 5.95% and 9.58% during the
period from 1990 to 2005.

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In recent years, the spread has exceeded 7% on the average.

High interest rate spread indicates that competitiveness in the

banking sector in Pakistan is either absent or is very poor

A cartel-like behaviour in banks appears to have taken place

within the policy space provided to the banks by the State Bank
of Pakistan.

This issue is largely attributable to weak regulation of interest

rates despite that the State Bank has the powers to control the
spread through monetary policy.

While non-operating loans and high administrative costs could be

considered as the major reasons in countries where spread is
high, these cannot be said true of Pakistan because banks are
earning huge profits at the cost of savings of the depositors.

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High interest rate spread is damaging the

competitiveness in economy in general, and in the
financial sector in particular. The State Bank should
exercise its powers to determine reasonable rate of
returns for the banks as well as the depositors. As a
matter of priority, interest rate spread should be
reduced, at least, to the level of average spread in
the South Asian region.

The growth in consumer financing has put great

inflationary pressure on the economy.

Acquisition of easy bank credit by the household

consumers has spurred the demand for many
essential and luxury items.

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The increase in demand has not only escalated the

prices of essential items, but has also stimulated
hoarding and black-marketing thus multiplying the
problems for poor consumers.

Proliferation of loans has given rise to new

development challenges.

The need for new roads in metropolitan cities is

directly linked with growth in auto loans provided by
the Bank.

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CONSUMER BANKING
PRODUCTSI:

BROAD CUSTOMER CATEGORIES:

Borrower Types, their age:

EMPLOYED

All permanent employees of Government, Semi

Government, Government Autonomous Bodies,
Corporations, Local and other bodies.

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EMPLOYED SALARIED CLASS

All other salaried class employees, including:

Permanent employee of multinational companies,

scheduled bank and reputed companies that have
been approached by the respective Bank.

Permanent employees of organizations other than

the approved list.

Contractual employees of the above categories.

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BUSINESS PERSON AND SELF

EMPLOYED PROFESSIONALS

Persons engaged in business (owner, partner,

director of a business concern)

Persons providing services ((architect, doctors,

lawyers etc. etc)

Proof of income is required from all above

Income tax certificate

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AGE RANGES AND NEED

All citizens of Pakistan after attaining the age

of publicity can avail financing facility as per
their requirement, provided all other
conditions have been fulfilled.
For employed (For all Consumer
Financing)

Minimum age is 22 and

Maximum age of the borrower at the time of
maturity of the finance is 59 years and 06 months.

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Business persons and self employed

Minimum age is 21 years and maximum age is 65

years at the time of maturity of finance
Needs To elevate the social status in the society
Personal Domestic needs etc. etc.
Built, buy or refurbish the home.
(i) Better locality (ii) Big house (iii) Family
constraints
Purchase of new car / charge of model
(i) Gift (ii) Dowry etc

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DEBIT / CREDIT CARDS

Avoid to carry cash / safety & security.

Immediate cash requirement

Short term borrowing

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Efficiency of repayment capacity assessment and

account activity monitoring system:

Selection of borrower is the most critical phase.

Assessment of repaying capacity or income
Estimation played a vital role for smooth functioning
of account.
Income estimation is conducted by independent
agencies of which cost born by the customer.
Financing facilities of Rs.15(M) and above required
to have two income estimation reports from two
different agencies and the cost will be born by the

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OPERATIONS:

Consumer financing, like other credit

facilities, must be subject to the bank's l DFI's
risk management process setup for this
particular business. The process may
include, identifying source of repayment and
assessing customers' ability to repay, his 1
her past dealings with the bank I DFI. the net
worth and information obtained from a
Consumer Credit Information Bureau.

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At the time of granting facility under various modes

of consumer financing, banks I DFIs shall obtain a
written declaration from the borrower divulging
details of various facilities already obtained from
other financial institutions. The banks I DFIs should
carefully study the details given in the statement and
allow fresh finance 1 limit only after ensuring that the
total exposure in relation to the repayment capacity
of the customer does not exceed the reasonable
limits as laid down in the approved policies of the
banks / DFIs. The declaration will also help banks I
DFIs to avoid exposure against a person having
multiple facilities from different financial institutions
on the strength of an individual source of
repayment.

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Before allowing any facility, the banks 1 DFls shall preferably

obtain credit report from the Consumer Credit Information
Bureau of which they are a member. The report will be given
due weightage while making credit decision.

Internal audit and control function of the bank I DFI. apart from
other things, should be designed and strengthened so that it
can efficiently undertake an objective review of the consumer
finance portfolio from time to time to assess various risks and
possible weaknesses. The internal audit should also assess
the adequacy of the internal controls and ensure that the
required policies and standards are developed and practiced.
Internal audit should also comment on the steps taken by the
management to rectify the weaknesses pointed out by them in
their previous reports for reducing the level of. risk.

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The banks I DFls shall ensure that their

accounting and computer systems are well
equipped to avoid charging of mark-up on
mark-up. For this purpose, it should be
ensured that the mark-up charged on the
outstanding amount is kept separate from
the principal.

The banks 1 DFIs shall ensure that any

repayment made by the borrower is
accounted for before applying mark-up on
the outstanding amount.

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DISCLOSURE /ETHICS:

The banks 1 DFIs must clearly disclose, all the important terms,
conditions, fees, charges and penalties, which interalia include
Annualized Percentage Rate, pre-payment penalties and the
conditions under which they apply. For ease of reference and
guidance of their customers, banks I DFIs are encouraged to
publish brochures regarding frequently asked questions.
For the purposes of this regulation, Annualized Percentage Rate
means as follows
Mark-up paid for the period x
360
x 100
Outstanding Principal Amount
No. of Days

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On-line Credit Information Bureau (ECIB)

While developed countries have a long tradition of maintaining a

centralized database of credit history of all borrowers, in many
developing countries it is a relatively new development, given the
scope and size of their lending activities. State Bank considers
the Functioning of an effective credit information bureau integral
in promoting financial discipline and an essential tool for credit
risk management by financial institutions. In its endeavor to
facilitate financial institutions in making prudent lending
decisions, the Credit Information Bureau (CIB) was established in
1992. Due to the rather small and largely secured lending
extended to individual customers at that time, the initial focus of
the CIB database was on capturing the negative history of large
and medium sized borrowers, with outstanding loans equal to
and above Rs 500,000 only.

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Over the years, SBP has significantly

enhanced the scope of CIB operations. In
April 2003, SBP enhanced the coverage and
effectiveness of CIB by introducing e-CIB
online facilities, becoming in the process, the
first credit history database of the region to
introduce online access to its member
financial institutions. This development
enabled financial institutions to upload their
data on loans directly into the CIB database
and readily generate customer reports for
their credit assessment purposes.

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In response to the rapid growth in banks'

credit
portfolio,
e-CIB's
reporting
requirements and operational and IT
platforms have been significantly upgraded.
The scope of the CIB database was further
enhanced during early 2004 when SBP
launched a new project called the "e-CIB
data lowering limit" with the collaboration of
Pakistan Banks Association (PBA) to achieve
the following objectives:

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Abolishing the minimum limit of Rs 0.5 million and

above for credit reporting and to expand the
database to cover all loans of member financial
institutions.

Changing the composition of the information to

include more financial and non-financial details of
the borrowers.

Improve the overall operational efficiency of a-CIB

by upgrading the communication infrastructure,
hardware and software, etc.

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The project aimed at transforming CIB into a

state-of-the-art credit information database
with the ability to minimize the turnaround
time of queries from financial institutions and
providing a quick source of information. The
project was successfully completed in June
2006 and brought significant improvements in
the overall operational and technological
infrastructure of the CIB. The key improved
features of the new a-CIB system over the
old CIB system are summarized below:

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Existing credit reporting limits of Rs 0.5 million has been

eliminated. Under the new reporting system, all outstanding fund
and non-fund based credit facilities, irrespective of the amount,
are being reported to SBP. Besides Banks and DFIs, for whom
membership in eCIB is mandatory, a large number of NBFCs
are also members of this database.

Product-wise
availability
of
loan
information.
Before
implementation of the new system, such information was
available in aggregate form only.

Improved efficiency in terms of speed, reliability and security of

C18 data

Deployment of high capacity servers, security firewalls, broader

bandwidth, point-to-point data encryption.

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Multi-user and multi-tiered Rich Client Data using latest

programming tools, provided to 100 financial institutions. The
software has been designed keeping in view the data collection
requirements of all financial institutions and can be customized
according to the needs of specific financial institutions. It can be
deployed in both centralized and decentralized environments.
The software is capable to efficiently collect, consolidate and
report thousands of records from all branches of a large bank.

Highly sophisticated and completely automated Back Office (BO)

system for processing data. With the implementation of the BO
system the task of data processing has been reduced from 15
days to 3 days only.

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Web based interactive data inquiry systems to

provide online Credit Information Reports to financial
institutions, and allow online amendment and
updates.

Replaced the previous dial-up system with a

scalable Virtual Private Network (VPN) that allows
financial institutions to connect to the a-CIB more
quickly and efficiently.

Comprehensive data validation rules implemented to

ensure correct entry of records. A validation rule
engine has also been developed for creating and
implementing new data validation rules.

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A new separate reporting system has been introduced for

consumer and commercial borrowers. The CIB will collect
consumer and corporate credit data on two separate specified
formats and provides separate credit information reports for the
consumer and corporate borrowers.
The credit report of the consumer also reflects the repayment
history for the last twelve months.
Record of last four credit inquiries from the financial institutions
has also been made part of the respective borrower's credit
report.
Formation of group of borrowers for CIB reporting purpose has
been left to the discretion of reporting financial institutions. The
reporting financial Institution reports information on groups of
borrowers according to the definition given in the Prudential
Regulations.

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The improved capacity and scope of the CIB has resulted in

immense benefits for the financial industry. The number of
borrowers in the CIB database has significantly increased from
around 0.03 million, mainly corporate and SME borrowers, to
around 4 million. It has also greatly expanded the outreach to a
large number of borrowers who remained outside the CIB net
because of the floor of Rs 0.5 million for reporting purposes. This
has important implications for credit expansion to low-value
borrowers of SMEs, agriculture and consumer finance sectors.
Further, in order to facilitate the users of the a-CIB system, SBP
has established a web based Help desk system for providing
efficient support to the users from various financial institutions,
and to help the general public in lodging their complaints
regarding credit-reporting issues.

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