A massive drop in interest rates barely nudged overall private sector credit offtake, but it did push the automobile industry into gear by revving up debt-driven car purchases. During the last three months, more than Rs21 billion of fresh auto loans were disbursed as consumers increasingly took benefit of an expansionary monetary policy. Auto loans have reached their all-time high of Rs232 billion. Just last month, Rs10.5 billion of auto loans were disbursed which is the highest monthly-level ever, shadowing a previous high of Rs10.2 billion, when interest rates were in the range of six percent.

Demand for auto loans is inversely proportional to interest rates. It is clear from monthly data dating back to 2007 that as interest rates decline, monthly car loan disbursements increase. Similarly, as interest rates increase, consumers avoid car loans, and there are more repayments, with overall size of auto loans declining. The sweet spot for interest rates stimulating auto sales is below 8.5 percent – as benchmark interest rate goes below this level, monthly loan disbursements, and eventually automobile sales gain traction.

It is not clear how many cars were actually purchased through loans, but assuming an average loan size of Rs1.5 million, it can be estimated that roughly 45 percent of the cars sold during the last three months were financed through bank loans. Similarly, at an average loan size of Rs2 million, bank loans would have financed approximately 33 percent of the cars sold during the period. Notably, car prices have risen during this time and the jury is out on whether the jump in borrowing to buy rides was a one-off bump to hit the road after the end of lockdowns.