Lowering limit on credit cards: SBP step to help reduce inflation: analysts

[LahoreEstate]

SOHAIL SARFRAZ
ISLAMABAD (February 15 2009): The State Bank of Pakistan's (SBP) decision to lower the maximum personal loan and credit card limit from Rs 2,000,000 to Rs 1,000,000 for an individual may lower the money supply in circulation, analysts opined.

Reducing money supply in circulation reflects tightening of the monetary policy, which the State Bank of Pakistan is committed to as agreed in the Letter of Intent submitted by the Government of Pakistan to the IMF Board as a prerequisite for the release of the 7.6 billion dollars standby arrangement, one analyst said.

Considering that credit card use boosts consumption, any attempt to curtail consumption levels would reduce the rate of inflation through reducing demand. But in times of recession it would deepen the recessionary phase by lowering consumption levels with an obvious impact on productivity levels and consequently on employment levels. he added. Another analyst said: "Pakistan is suffering from stagflation. We have declining industrial productivity, attributed to high interest rates.

A dramatic decline in our GDP growth forecasts for the year and little prospect of a major investment inflow locally or from abroad due to the global financial crisis, our own energy crisis and law and order problems. At the same time, we have inflation above 20 percent and this is in spite of some minor downward fluctuations in any given week."

He said: "The existing rates on credit cards are very high, and range between 2 and 3 percent on monthly basis, and are charged every month after due date of credit card bill.

In case of non-payment, or minimum payment, which is 5 percent of the total outstanding, the interest is charged on total remaining outstanding amount and from the date of purchase. If the interest on credit cards is not paid for 6 months, the non-payer would be considered a delinquent customer. In case of non-payment above 6 months, credit card holder would be declared as defaulter. "It is also pertinent to note that those outlets that accept credit cards charge around 2 to 3 percent for processing the card.

This is in addition to bank interest charges on purchases made on the card." Business Recorder undertook a survey to assess banks' staff views on the decline in the maximum credit card limit from Rs 2 million to Rs 1 million on an individual. There was unanimity of views that this measure was undertaken to reduce the growing number of defaults. By fixing the limit at lower level the central bank is focusing on risk management of banks.

Due to rising default on individual credit several banks have been forced to close some of their credit lines. The most affected has been auto finance which, in turn, accounts for a dramatic decline in the number of vehicles sold in the country with a commensurate impact on downstream industry as well as employment levels.

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