Amount of outstanding auto financing decreased for the fifth consecutive month at the end of November, data released by the State Bank of Pakistan (SBP) showed on Thursday.
The amount stood at Rs388 billion at the end of November, which is slightly higher than the November 2021 figure of Rs385 billion. The latest outstanding auto financing figure is 1.2% lower than its October 2022 level, which witnessed auto financing to the tune of Rs393 billion.
A massive increase in car prices, soaring interest rates, various measures to slow down auto financing, plant shutdowns of various assemblers in the last few months, and automakers' struggle to get Letters of Credit (LCs) opened by commercial banks is affecting the trend, said an expert.
“Auto sales have declined significantly, and 35-40% of that demand came from auto financing, which is currently witnessing net retirement of loans, as there are not much flows coming,” Fahad Rauf, Head of Research at Ismail Iqbal Securities Limited, told Business Recorder.
“One of the main reasons behind the decline is high-interest rates, leading to affordability issues,” said Rauf.
“The policy rate is at 16%, while the KIBOR remains at 17%, which has almost doubled the cost of interest component. Meanwhile, SBP's decision to reduce the tenure of auto loans has also dented affordability,” said the expert.
Last year in May, the SBP announced to reduce the maximum tenor of auto finance facility by two years with immediate effect.
The SBP amended the Regulation R-11 of Prudential Regulations for Consumer Financing (PRCF) related to auto loans and financing to reduce the maximum tenor of auto loans being provided by the banks to the customers, under which the maximum tenure of auto finance facility was reduced from five (5) years to three (3) years for vehicles above 1,000 cc engine displacement.
For vehicles up to 1,000 cc engine displacement, auto financing and loan was also reduced by two years from seven (7) years to five (5) years.
The expert was of the view that auto financing is expected to maintain a declining trend, as economic situation continues to deteriorate, while inflation is expected to remain high.
“Overall auto sector would remain subdued in the coming months.”
Automobile sales in Pakistan fell 38% in December 2022 to 16,811 units on a year-on-year basis, according to data released by Pakistan Automotive Manufacturers Association (PAMA) on Wednesday.
The decrease was driven by restrictions on import of completely knocked down (CKD) units and problems pertaining to opening of letters of credit (LCs). Experts foresee car sales to drop 40-50% in the fiscal year 2023.