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Structured Finance Unit

Micro-credit Pakistani, Buy Only Pakistani

When individuals and businesses cut down on the quantum of credit they take from the financial institutions, that is a clear danger signal for the economy. On the other hand, acquiring of loans beyond one’s ability to pay back is far more lethal. Defaults lead to liquidity crunch, threatening the viability of the financial institutions. Failing banks are a luxury no economy can afford. In Pakistan, there is an attitude of mind that makes even those with the ability to pay back seem to think that it is their God-given right not to do so. Prudential regulations were on the books of the State Bank of Pakistan (SBP), after Oct 12, 1999 there was greater compliance. Banks are now far more prudent over the past year in lending, collateral is looked at with greater cynosure. With a host of “untouchable” defaulters being “Nabbed”, businesses have become far more conservative in borrowing. As a cumulative result, economic activity is far below the optimum levels which one would term satisfactory for future development. Only when entrepreneurs begin to take calculated risks is such activity generated. With huge loans souring in the manufacturing sector, cash-starved financial institutions generally became gun-shy in giving out large credits, as the cash situation improves lending has not reached commensurate levels. To break out of this Catch-22 situation, i.e. to become profitable banks must lend monies and to avoid losses loans must be carefully engineered, some of the banks have created a new division as a sort of an investment arm, calling it the “Structured Finance Unit” (SFU). As opposed to the activities of the SFU, almost all financial institutions are turning to smaller loans/credits reaching out to a greater number of people. Citibank was a pioneer in consumer credit but indifferent management caused panic situations. And other financial institutions are rapidly catching up. “Khushali” micro-credit bank has been created in the public sector, whether it is effective on the “Grameen Bank” pattern has yet to be seen. Another way of indirect micro-credit is the credit card business, again pioneered on a mass basis by Citibank. Whereas leasing, securitization, etc are among the modes for financing vehicles, equipment, etc, the new financial buzzword is small-credit to individual consumers. Consumer hire/purchase activity of the middle-class fired the cylinders of the economies of the developed world. This easy access to small credit has now finally arrived in the heart of the Third World and has been grasped at with both hands by South Asia’s aspiring millions. One note of caution, if we do not exercise prudence in regulating the micro-credit idea, it can work as a poison pill that will destroy the economy.

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