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As the country battles a bulging import bill, the State Bank of Pakistan (SBP) reduced on Tuesday the consumer financing tenure for vehicles, bringing it down to a maximum of three years for cars with engine displacement of over 1,000cc, and to five years for those under 1,000cc.

In its circular Letter No. 19 of 2022, the SBP decided to make the following amendment to Prudential Regulations for Consumer Financing (PRCF):

“The maximum tenure of auto finance facility is reduced from five (5) years to three (3) years for vehicles above 1,000 cc engine displacement and from seven (7) years to five (5) years for vehicles up to 1,000 cc engine displacement,” read the circular.

The central bank further said that other amendments issued earlier, vide BPRD Circular Letter No. 29 dated September 23, 2021, will henceforth be applicable on financing for all locally assembled/manufactured vehicles, including on financing for vehicles of up to 1,000 cc engine displacement and locally assembled/manufactured electric vehicles.

“However, the regulatory treatment of Roshan Apni Car product communicated earlier to RDA participant banks will continue to remain effective,” read the circular.

SBP raises key interest rate by 150 basis points, takes it to 13.75%

SBP said that the amendments in PRCF will be applicable, with immediate effect, on new financing facilities where the Banks/DFIs have not granted the approval yet. However, all other instructions on the subject shall remain unchanged.

The central bank's latest measure comes a day after the Monetary Policy Committee (MPC) raised the key interest rate by 150 basis points, taking it to 13.75%, the highest interest-rate level since 2011 when it stood at 14%.

On the same day, the SBP announced an increase in the markup rate for financing under Export Finance Scheme (EFS) as well, taking it from 5.5% to 7.5%.

Will not impact banking sector, but negative for autos

Fahad Rauf, Head of Research at Ismail Iqbal Securities Limited, said the measure will not have much of an impact on the banking sector, but will be a negative for the auto industry.

“Banks will have other avenues to move their financing from auto to other sectors,” Rauf told Business Recorder.

“In the current economic situation, where interest rates are already high, banks will not aggressively pursue auto financing as their priority has shifted from consumer to corporate lending,” he said.

However, the central bank's latest measure alongside the ongoing rise in car prices will not bode well for the auto sector, added Rauf. “It is estimated that 30-40% of the auto sales generated are through auto financing. A reduced tenure means the instalment amount would rise, denting demand,” he said.

Export Finance Scheme: SBP announces increase in markup rate

Earlier, the government also announced a ban on the import of 38 products to arrest the decline in foreign exchange reserves.

The latest measure could provide a minor relief to the economy, in curtailment of the import bill, especially in terms of auto parts.

“However, its impact would not be much, in comparison to the overall imports,” he said.

Another market expert added that the latest SBP measure is aimed at curtailing consumption. “The measure will increase the instalment amount by around 70%, and impact banks involved in auto financing.”

The expert added that a reduction in consumption will decrease auto sales by 25-30%.

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