BR RESEARCH: Auto financing responding eagerly to rate cuts

After two years of deep and prolonged contraction, auto financing is responding rather eagerly to rate cuts. After multiple consecutive slashes, policy rate stabilized at 11 percent between May and November 2025 (not counting this month’s 50 bps reduction).

Net borrowing for auto loans consistently stayed positive throughout; first showing signs of recovery when rates were brought down from 22 percent to 13 percent.

But it wasn’t until rates hit 12 percent in Jan-25 when loans really began to pick up momentum. This is near-textbook inverse between interest rates and auto loans. Despite the overwhelming recovery though, this may not be a stronger credit market, but a more strained one.

While rates appear to be the primary driver for a recovery in auto financing, it is telling that average net borrowing in FY26 so far, over just five months, already exceeds the average net borrowing in FY21, the peak season for auto borrowing under historic low rates.At the time, average rates were at their lowest at 7 percent.

When rates started to go up, net borrowing responded in reverse almost consecutively. By FY23, as rates tightened aggressively, auto borrowing effectively shut down with net flows turning decisively negative. As rates began to loosen again in FY25 net borrowing reverted quickly.

Even though till November-25, policy rate was still in double-digits, average net borrowing crossed Rs8 billion.

The fact that average net borrowing now exceeds its low-rate peak, despite higher interest rates and strict financing regulations (lower tenors, financing limit of Rs3 million, higher minimum equity threshold of 30%), it must suggest that the market is driven by necessity and price pressures, not easy credit or affordability.

Lowering rates have certainly helped, but tighter regulations and price pressureshave amplified buyer stress. Buyers are absorbing higher upfront cash, shorter repayment horizons, and much higher monthly payments, despite rates remaining well above their historic lows.

Certainly, rate cuts have supported automotive demand. After years of suppressed demand, the market has been reinvigorated with new models and new engines. From a policy lens, this should play into the SBP’s playbook: credit is flowing (great for growth optics) but demand is tempered by tighter regulations (keeping imports capped) soexternal pressuresremained contained.

Meanwhile, households bear the adjustment cost. That’s onewin for macro stability, one for banks and let’s give a partial win for consumers who may have to adjust to tougher car payments but at least they have a brand spanking vehicle at home they can call their own.

However, if imports keep their current trajectory, given that imports of CBU and CKDs in July-Oct surged 30 percent and 122 percent respectively year on year, all these wins may be short-lived after all.