Auto loans are surging again, and the growth in volumetric sales is competing recent peaks. One could credit the falling interest rates for this resurgence but the plot is thicker than that.
Certainly, the relationship between auto loans and interest rates have stood the test of time—when rates fall, loans rise and when rates begin to tread up, loans fall. But net outstanding loans are close to their record highs, even though Kibor is still in double-digits and not near as low as rates could be.
First, the recent growth is visible and obvious. After the peak in FY22, net auto outstanding loans turned negative as rates quickly rode up—jumping from an average 10 percent to 18 percent and 22 percent where they stayed for one full year.
When the MPC finally started to cut rates in June-2024, credit did not fully respond. In fact, it wasn’t until December when rates fell to 12 percent that net borrowing fully turned positive. At the time of falling loans, the infection ratio also climbed slightly, though still staying below 2 percent.
Such low infection ratios are not maintained accidentally. Banks continue to remain cautious and wary of consumer financing, and inflexible on strict documentation requirements for all kinds of loans, car loans included. Therefore, the turn in net borrowing from negative to positive is indicative of a demand that is genuine and not fuelled by weak borrowers or speculative lending.
What has happened is that regulatory tightening since FY22 has reshaped the landscape. Lower maximum tenors from 7 to 5 years, higher equity requirements (15% to 30%), and a cap on loan size (Rs 3 million!)all mean borrowers are taking on bigger monthly commitments, specially since cars are much more expensive than before. Pent-up demand and necessity are the dominant forces in play that are leading to a greater rebound in loans.
In the absence of new disbursement data, we approximate gross auto loan originations by adding an estimated amortization flow to the observed change in outstanding auto loans.
While imprecise, this series is informative about the direction and cyclicality of bank credit to the auto sector. To estimate this, we assumed that between FY20 and FY22, loans are amortized at 14 percent (for a loan tenor of 7-years) and when SBP regulations tightened, loans were amortized at 20 percent (for a loan tenor of 5 years). This gives a rough estimate of loan repayments throughout the year. Adding these estimated repayments to net outstanding loans provides a rough estimate of new originations.
The new loan origination from FY20 till FY26 shows a clear contraction when rates rose, and a rebound in credit when rates began to decline.
Clearer than the net borrowing statistic—this measure gives a more complete picture of monetary transmission, even though it is based on estimated loan tenures.
Given this estimation, and the fact that asset quality has been maintained (and improved by a reduction in infection ratio), the credit growth seems even more necessity driven than before. Regulators continue to enforce tight oversight, ensuring systematic checks on lending practices.
SUVs and luxury vehicles are typically purchased with cash, suggesting that the surge in financed purchases may be concentrated in mid- to small-engine cars.
Yes, the loan market is expanding in the automobile sector but new loans now involve higher upfront payments and larger monthly commitments over shorter repayment horizons. Such is the fragility of an average car buyer.
The surge in originations and steady infection ratios show that lending can grow even under stress—but only because perhaps households have little choice but to borrow.
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