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Personal loans: a prudent tradeoff would work wonders

Personal loans: a prudent tradeoff would work wonders

It is rather customary in numerous countries to avail personal loans to go on a vacation, visit some foreign countries etc which could be termed as a cultural phenomenon and also economic model of a particular country. On the contrary, Pakistan where millions of impoverished individuals go hungry every day, by and large, cannot adapt to that phenomenon as such.

There are tempting offers by numerous banks in Pakistan to lure clients for personal loans. Following are some of the prime instances of marketing gimmicks:

Central banks all over the world adopt an easy monetary policy to encourage borrowing from banks to create room for private-sector lending which leads to economic growth generating employment opportunities for millions. The objective of the personal loan schemes must be economic recovery rather than addressing the hardships of individuals solely. There is no denying the fact that consumer spending spurs economic recovery in almost every country of the world. Banks in Pakistan have made fresh personal loans of billions of rupees recently, which must reflect in the economic growth. Premised on this, there should be visible spike in manufacturing and service industry.

It has been observed that large-scale manufacturing grew at 7.4% in July-November 2020 against a contraction of 5.3% in the same period of 2019. The demand for commercial automobiles like small and medium delivery vans has soared recently, which is the evidence of growing economic activities throughout the country. Banks’ lending to retail businesses has escalated which shows the spike in business activities. In the wake of acceleration in the demand of products and availability of the wherewithal, it is always the case that the prices inflate which happened in Pakistan as well when inflation rate rose to 14.6% recently reaching the highest level in 12 years.

The policy rate retreated from 13.25% to 7%, which spurred the economic activities as well. All this leads to more spending by consumers and more borrowing from the financial institutions leading to economic growth eventually.

It is anticipated that the GDP growth of Pakistan even in the given circumstances would be up to 2.5% by the end of the current fiscal year vis-à-vis the 0.4% contraction during the preceding year. There is no denying that borrowing through personal loans and to the private sector would play a crucial role during these trying times when almost every economy of the world is either stagnant or encountering contraction.

Since around 35% of the total 220 million people in Pakistan reside in the urban areas and have somewhat purchasing power, personal loans could bring tremendous economic activity in the manufacturing and the services sector. Commercial banks have to broaden their horizons by focusing on the larger perspective instead of lending only to two million people, to be precise. Even if 10 million active loan customers are targeted with prudence, it could bring about a paradigm shift in the financing.

There must be a fair play when it comes to giving loans to particularly the poor and uneducated segment of the society. There are instances when some poor borrowers are charged exorbitant fixed interest rates as high as 32.99% per annum. It is being justified as entailing greater risks and higher cost of making, monitoring and recovering loans.

Saving culture must be promoted in Pakistan for long term stability of the rickety economy of Pakistan, which is worth $278 billion, however, personal loans etc. would also be crucial for employment generation, manufacturing and services sectors.

A prudent tradeoff would work wonders.

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