The banking sector posted a significant jump in consumer lending last year riding on growing purchasing power of the middle class.
Consumer credit rose 31.29 percent year-on-year to Tk 29,500 crore in 2016 from Tk 22,460 crore a year ago, according to Bangladesh Bank data. The segment accounted for 4.37 percent of the total outstanding loan in the economy.
“Consumer credit has been rising for several years as the purchasing power of the people has increased,” said MA Halim Chowdhury, managing director of Pubali Bank.
He said the middle class is expanding with improving living standard, which is pushing demand higher.
The salary hike of government employees also accounted for the growing consumption habit, he added.
Consumer financing is now more affordable as the lending rate is lower than the average interest rate, said a senior executive of a private bank.
The weighted average interest rate on consumer financing was 9.46 percent in July whereas the average lending rate for other loans was 9.56 percent, according to the BB.
Of the total consumer lending, the highest 44.5 percent or Tk 13,130 crore, was used for personal purposes.
In April this year, the central bank increased the personal loan limit to Tk 5 lakh without any securities, from Tk 3 lakh earlier to support the rising consumer demand.
Banks may lend more if the loan is backed by liquid securities. But the loan cannot exceed Tk 20 lakh under any circumstances, according to the central bank.
The loan to credit cards, another component of consumer financing, stood at Tk 3,440 crore in 2016.
In April, the credit card limit was increased to Tk 10 lakh from Tk 5 lakh earlier to support the spending habit among consumers.
Banks can provide an additional Tk 10 lakh limit but cannot exceed Tk 25 lakh. The excess debt will have to be backed by liquid securities such as fixed deposits and foreign currency accounts maintained with the respective bank.
The rising demand for credit cards prompted the central bank to issue a guideline on the payment method in May this year and put a cap on the lending rate to protect customers.
As a result, the interest rate on outstanding amount of credit card will not exceed 5 percent of the highest interest rate charged for any debts by a bank, according to a central bank guideline.
The average lending rate came down to 30 percent on credit card loans in July from highest 36 percent in May.
Outstanding credit for home and car loans, two other important areas for consumer financing, stood at Tk 10,900 crore and Tk 2,000 crore respectively last year. Despite the growth in consumer spending, the number of non-performing loans in the personal credit was lower compared to the industry average.
The non-performing loan in the personal loan category was 5.3 percent in 2016 against the sector's average of 9.2 percent, central bank data show.
The default rate for home loans was 8.5 percent, the highest among all segments under the consumer lending, while the rate was 5.5 percent for car loans. It was 8.4 percent for credit card loans. The default rate in the credit card segment is high because of the higher interest rate, said a senior executive of the BB.