Chamsul Huq Zahid |
July 25, 2021, 9:42 p.m.
What an irony! Banks are struggling to attract customers for their consumer credit, which is now offered at very attractive interest rates.
Demand for this particular type of loan has fallen to its lowest level ever in 2020 and the trend continues.
The situation was quite the opposite in the years leading up to the pandemic when the average consumer credit interest rate was almost double the current rate.
According to a report published in a vernacular business daily, the growth rate of consumer loans in 2020 fell to 6.0% while the borrowing rate for the same fell to 7.0-8.0%. In 2017, growth peaked at 16%, with banks charging up to 16-17% interest.
The pandemic has been responsible for the drastic drop in demand for consumer credit covering the use of credit cards and the purchase of cars and apartments etc. as well as personal loans.
The pandemic has undoubtedly changed the economic landscape. If not for the rich, the invasion of the deadly pathogen has also hit the middle classes hard, who remain the main customers of consumer credit. Many members of this class have lost their jobs or suffered pay cuts. Income from other sources, if any, has also dried up or declined to a large extent.
Not only banks, manufacturers and sellers of consumer goods, including electronics, electrical appliances, leather goods, clothing brands, are also deeply affected. The profitability of most of them has declined and some are even suffering losses.
It is an uncertain time. No one knows for sure when normalcy will return to everyday life. Like everyone else, middle class people are also gripped by fear and worry. So, they kept their non-essential expenses as low as possible and tried to live on the bare minimum.
Banks are also responsible for the drop in demand for consumer credit. They have reduced interest rates for all types of central bank instructional loans. The truth is, the government wanted lower lending rates to help lower the cost of doing business and stimulate private investment. All of this came at the expense of depositors who now have a negative return on their money held in banks. The extent to which the cut in lending rates has met targets remains a question to be examined.
Banks have always been picky in selecting clients for consumer loans, although this earns them higher profits. Banks are now more selective than before because the pandemic has severely affected the financial capacity of their target customers. Thus, the weakening of the interest of the main target customers coupled with the cautious approach of the banks created a negative effect on the distribution of consumer loans. The situation may remain so until life returns to normal in the event of a noticeable improvement in the Covid situation. It is difficult to say when this would happen. But a lot will depend on the speed and coverage of the current immunization program.
A few people in power may argue otherwise, but the fact remains that the pandemic has given rise to serious economic problems at all levels. The poor, the middle class and the rich — all are affected. But the ability to withstand the onslaught varies considerably. The rich, of course, can easily undo the damage. Middle-class people are having to make adjustments and suspend some non-essential spending during one of the most difficult times in human history. The story is different for the poor at this time of unprecedented economic hardship. They are now unable to sell their work and earn a living. There is no one to help them either. During the first wave of the pandemic, help came from the government and many other private sources. But that largely dried up during the ongoing second wave.
The middle class, which represents more than a fifth of the population, plays an important role in the economy. They spend a sizable amount of money on essentials and some non-essential items. It supports the economy. When they reduce their consumption for one reason or another, the economy suffers. Producers of non-essential goods, including electrical and electronic goods, high-end clothing, leather goods, etc., are also being forced to slow down their production. It hurts them and the government. The latter collects less income in the form of value added tax and corporate tax. Some factories resort to downsizing or temporarily suspending production. This again worsens the condition of the working poor.