How difficult is it for Pakistani youth and women to get a loan from a bank?

I guessed from a friend how difficult it can be for a young man in Pakistan, especially a woman, to get a loan from a bank.

"I approached various banks to get a loan," she says. It is not clear from any bank what the actual policy of the bank regarding lending is, such as what the interest rate will be and what the repayment installments will be and what the charges will be. ۔ '

He claims that every bank is just a dream come true and even for most educated youth it becomes difficult to understand these complex details of the loan.

According to her, when she went to get a loan from a private bank, she was asked to sign a scheme after being told about the many merits of the scheme. He was told, "You have to answer yes to every question in the confirmation call from the bank representative, otherwise it will take time to get the loan and problems will arise."

According to the woman, the exact details of the loan are actually known to you from the same confirmation call as 'this call is recorded to maintain quality standards' and can be used later as admissible evidence if required. ۔

She says she learned from the call that "the interest rate under the scheme under which I was being given a loan was actually double." She says that due to her personal compulsions, she had to take out a loan with interest. The rate was high.

What types of loans do banks give?

Asad Raza has been involved in the banking sector in Islamabad for the past 13 years and is also the Area Head of a private bank. According to him, every commercial bank offers two types of loans: consumer loans and non-consumer loans.

Consumer loans are small loans that a bank gives to its customers to start a new business, expand an existing business, or invest in a sector. This includes providing a car purchase, a credit card or even a home loan.

Non-consumer loans do not provide financial assistance in the form of money or cash, but the bank provides a guarantee from its customer for any business transaction.

Bank loan and interest rate

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The general idea is that if someone has taken a loan of Rs 100,000 from a bank at 12% interest rate, it means that they will have to repay a total of Rs 112,000 to the bank. But it's not as simple as most people think.

According to Asad Raza, if a bank has given you a loan of Rs 100,000, it will depend on whether it is 'running finance' or a year-end markup.

Running finance is a limited term loan in which the bank sets an upper limit on the loan to cover the daily expenses of a business and now it is up to you how much money you use in it. The more money you spend, the more the markup will increase.

Markup refers to the loan utilization fee, part of which goes to the SBP and the other to the lending bank.

How are installments fixed on a bank loan?

Ali Sultan, who is associated with the banking sector, explains that when providing a loan to a customer, the bank creates an "amortization schedule" which is also commonly known as "how many installments."

In this schedule, the bank explains to the customer how much interest he will be charged each month for the amount he has borrowed yesterday.

According to Ali Sultan, "In the first category, banks charge an interest rate of 12% on your entire amount at once, after which the customer is told how much he has to pay in installments every month."

In the second category (compound interest), the amount saved in your account after paying the first month's installment is calculated on the second month's installment. And that's the way it goes. "

According to Ali, APR (annual rate) is mentioned in consumer loans. If a person has a banking understanding, he must ask for APR when taking a loan. This includes other elements, including processing cast and compounding. "If a person is borrowing at 12 per cent interest, it actually means that he is paying 18 to 19 per cent interest."

How is the annual installment amount reduced?

The share of interest is higher in the initial installments of a bank loan. If you have taken a loan of Rs. 1 lakh for five years at 10% interest rate, you will have to pay Rs. In other words, a total of Rs 35,000 will have to be repaid in the first year.

When the second year begins, your installment will be calculated at 75,000. So now you have to pay Rs. 7500 with 10% interest rate on 75 thousand, ie your second installment will be Rs. 32500.

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Similarly, the amount of installments decreases every year.

Many people believe that if you take out a loan, most of the payments made in the first few years are accumulated in interest rather than your principal. You may have heard most people say that banks pay interest first and then the real money because the higher the actual amount, the more your interest will be.

But Asad Raza disagrees. He said that like other countries of the world, the Central Bank of Pakistan has also fixed the ratio of interest to principal and every bank must follow these rules.

"The ratio remains the same. As your principal decreases, so does your interest.

What is compound interest?

According to Assad, compound interest means that if you have taken a loan of one lakh at an interest rate of 12%, the amount of interest on it becomes 12,000 for a year and 1,000 for a month. If you do not pay that amount in one month, you will have to pay one lakh and one thousand in one month. And the next interest will be calculated on the basis of one thousand and one (uncollected balance). That's why being compounded makes more money.

You may have heard most people say that their compound interest amount has exceeded the actual loan amount and the borrower has lost his savings.

In case of compound interest, if you make payments at the same time, you do not have to pay extra interest and the payments continue as per the schedule given to you by the bank, but if you do not repay the loan installment on time, then compound interest also Joins it

What does the bank consider when lending?

When lending to any type of bank, the main thing is that you have proof of any kind of source of income and whether you can repay the loan taken from the bank within a specified time. Banks issue loans after verifying the details provided by the customer.

Assad says the bank has clear guidelines for lending to anyone, which are monitored by the SBP.

If a salaried person is getting a loan, the bank sees where he is doing the job and whether his job is permanent.

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According to Ali, "experience" is very important for a bank. The most important thing for a bank is the customer's cash flow, ie how the bank will ensure its recovery. If a person is not paid and wants to start a new business, then according to Ali Sultan, the bank determines the nature of the business and the chances of success and then issues a loan.

Ali cites the example of a software engineer who can get a loan to open a software house, but it can be difficult to get a loan to open a clothing boutique.

Banks also look at your guarantors when lending.

Are banks reluctant to lend to women?

Saima Amjad says that if we talk in terms of Pakistani society, then of course this element exists and women are not given equal status.

However, she said that things were changing and that women's business plans and backgrounds were more important than women's gender. "It simply came to our notice then.

But both Ali and Assad disagree. "We are not hesitant at all, but if they do not meet the SBP guidelines, we cannot break the law," Assad said. We lend to a woman as happily as we lend to a man, but it depends on how good their profile is.

Why is the borrowing rate among women low in Pakistan?

Saima says that women in Pakistan are not coming forward to take loans themselves. Citing this as an example, she says that the government's youth loan scheme between 2013 and 2018 had a 50 per cent quota for women.

"In total, only one lakh people applied for loans, of which only 12 per cent were women. That is why the quota for women in the recent government loan scheme has been reduced from 50 to 25 per cent.

In this regard, Asad says that most women in Pakistan depend on their husbands, brothers or fathers and that is why their borrowing rate is lower than that of men.

Explaining the reason, Assad says, "In our society, women did not have much interest in business and careers before, but now the situation is changing."

Asad said that as per the SBP guidelines, all banks are pushing for more women to open accounts so that more women can be part of the banking network. Therefore, the rate of loans to women is likely to increase in the future.

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What is the easiest way for young people?

Asad said it would be better for young people to borrow from a government scheme (in which the government lends on easy terms to start a new business) rather than from a bank, as it would provide heavy guarantees. Not required Every government launches such schemes and this is the best way for the youth.

Citing an example of a recent government scheme, Saima says that up to Rs 10 million can be borrowed under the 'Successful Youth Scheme', it just depends on your plan.

According to Assad, another form of this is small-scale "unsecured landings" or loans in which you do not need security.

Citing the example of the Aga Khan model prevalent in rural areas, Ali Sultan explains that if a woman in rural areas wants to start a new business, she gives her jewelery to the bank as a guarantee, in which case she will be shortened within 24 hours. Get a loan to start your own business.

It may be recalled that this project was started by Aga Khan Foundation in Gilgit in the 80's. This model was later adopted in every province of Pakistan.

"Borrow as much as you can repay."

According to experts, only one person in a family can take a loan on an asset like property at a time.

Young people and women can get a secured landing loan of up to Rs 2 million for their small business, but for more, they should increase their financial resources or raise money from private sources.

According to Assad, before taking a loan from a bank, the consumer should correct his statement, determine the loan amount and take care of the current and future interest rates and keep abreast of the market. "Our formula for borrowing should be three times your income," he says.

Asad says borrow as much as your business can afford and don't be a burden.

"As we say at home, spend as much as you earn. Even when you take out a loan, you have to make sure that you start adding an extra expense to your income. You have to see if your income allows it." And will you be able to repay the loan regularly in the near future? If so, take a loan, otherwise it is better to stay away from it.