Back on the road

With policy rate cut by half, auto loans have made a strong comeback, and it has translated in a resurgence of vehicle demand. In 11MFY25, cumulative sales for passenger cars, SUVs, and LCVs rose 40 percent signalling that industry demand may be on the mend from last year’s slump.

It hasn’t been long that net borrowing within automotive loans have become positive. A positive net borrowing suggests that more fresh disbursements are being made against new loans than repayments against loans already made. For 26 consecutive months, net borrowing remained in the red as the policy rate climbed from 13.75 percent to a peak of 22 percent—where it stayed for 12 straight months.At its peak, where 6M-Kibor crossed 23 percent, auto financing was almost too expensive, given also that at this time, the SBP had significantly tightened its prudential regulations for car loans.

Loans against new cars came with more scrutiny, considering banks’ low risk appetite, and a host of regulations such as shorter loan tenor and a higher equity contributions. There were restrictions on financing for imported cars. Consumers were buying cars on cash, and the more affluent of the population was able to do so without trouble. Sales tumbled by 52 percent in FY23 compared to the previous year, and by 64 percent in FY24 compared to FY22—which happened to be a period of great flourish: low rates, economy in spending mode, and a flurry of new players shooting their shot at market share. Some, as we know, were fairly successful.

Demand has now recovered from last year, but still lower than FY22’s peak—lower by exactly 46 percent. Though rates have lowered, cars come with a heavier price tag, prudential regulations have not relaxed and kibor remains in double digits.

The government’s move to liberalize the import policy may threaten domestic assemblers’ competitive edge, but the real risk lies in the potential commercialization of used car imports which is a proposal under consideration. This one move—though potentially devastating for OEMs—is honestly a long time coming.