Gone are the days when we had to save for 6 months to buy a television, 5 years to buy a car or 10 years to buy an apartment. We can instantly start enjoying the benefits of these commodities and pay for them later. Consumer credit enables this. Traditionally, the culture of committing to credit-based expenditure has not been prevalent in Bangladesh. A mentality of “earn first, then pay” is dominant among consumers. Western economies, however, have been reaping the benefits of consumer credit for years and Asian economies including India are quickly following suit.
Consumer credit is a blessing in many ways, from the perspective of consumers and government bodies alike. Consumer finance increases people’s purchasing power beyond their “real” capability, which naturally increases consumer spending and pushes the ceiling for economic growth. A more active economy creates more jobs and these additional jobs further increase consumers’ purchasing power at a macro level. The cycle continues, multiplicatively churning out a positive impact on the economy (Figure 1). An economy needs an artificial boost in purchasing power to unlock newer opportunities and continue growth, and consumer finance enables precisely this from the demand side of the spectrum, while simultaneously affecting the supply side. Moreover, growth in consumer loans benefits banks by absorbing their excess liquidity.
Bangladesh is not lagging far behind in terms of consumer credit adoption. According to Bangladesh Bank data, consumer credit rose 16% year-on-year in 2016, and accounted for only 1% of the total outstanding loans in the economy (as of June 2016). This is consistent with the steady downward trend that has been observed in average interest rate on consumer loan products, which fell to 12.83% in December 2017 (Figure 2). In the past few years, the usage of credit cards and the number of cards in the market have been on the rise (Figure 3). All major retail outlets and consumer goods stores accept credit cards at POS and many of them provide EMI facility. This serves as an evidence for the readiness to adopt credit in the consumer market.
The most common drawback of using credit is the inability of consumers to find the proper balance. Instances of people being rendered homeless due to credit card debt are becoming more and more frequent. People often spend at a disproportionately greater level relative to their earning potential. Managing personal finances is an essential life-skill that the target market lacks to a great extent.
Newer generations, the more prolific users of consumer credit, have a higher propensity for spending than for saving and occasionally exhibit imprudent management of their disposable income. An increase in Non-Performing Loans (NPL) in India is creating problems in the banking sector. These threats are not geographically confined: the risks are ubiquitous across economies enjoying consumer finance.
Moderation is the key. Regulators must take measured approaches entering into the consumer finance domain to ensure consumer protection. Otherwise, people can hurt their financial position and potentially endanger the economy owing to the direct impact of write-offs. In May 2017, the rising demand for credit cards prompted the central bank to issue a guideline on the payment method and put a 5% cap on the lending rate to protect customers. Additionally, banks have been advised to ensure that the consumer financing growth rate does not exceed total loan growth. Best practices around the world show that forward thinking banks and traders set strategies to ensure consumer protection because consumers failing to pay back is their loss too. But, at a larger scale this can create even a bigger problem for the economy as seen in India and therefore, regulators need to step up. Uninitiated consumers of our country do not have the experience of using consumer credit and hence, consumer protection is even more important.
While there are risks of having consumer credit in the economy, it is a necessary piece of the puzzle to ensure economic growth. Central bank data shows that despite the growth in consumer spending, the number of non-performing loans in the personal credit (5.3%) was lower compared to the industry average (9.2%) in 2016. Moreover, this risk can be minimized to a degree where the fruits of consumer finance outweigh the potential risks. The regulators should welcome consumer credit and prepare the economy for a smooth transition to this system.