Auto financing slows down

Data shows borrowing made to purchase vehicles inched up just 1% in Nov

KARACHI:

Automobile financing in Pakistan is showing a sluggish growth due to soaring car prices, contracting purchasing power of consumers and discouraging auto finance policies introduced to mitigate the trade deficit.

While the automobile financing ticked up during November 2021, according to the State Bank of Pakistan’s data, the overall credit disbursed to consumers for the purchase of vehicles registered a slowdown.

The borrowing made to buy cars reached Rs349 billion in November 2021, which was just 1% higher than the October 2021 figure. This is also the lowest monthly increase since July 2020.

However, car financing jumped 42% last month on a year-on-year basis.

“The month-on-month slowdown can be attributed mainly to the amendments made by the State Bank of Pakistan (SBP) in the prudential regulations for auto financing,” said Arif Habib Limited (AHL) analyst Arsalan Hanif.

Speaking to The Express Tribune, he said that the central bank had revised prudential regulations for consumer financing through a circular.

“The primary aim of the change in regulations is to dampen demand growth in the economy and reduce import bill of the country in a bid to lend support to the balance of payments,” he said.

This revision is not applicable to the locally manufactured cars having engine capacity of less than 1,000cc and domestically manufactured electric vehicles as the government wants to protect consumers of the lower and middle-income categories and promote the use of clean energy, he said.

On the other hand, this revision has tightened the regulatory requirements for cars of 1,000cc and above and other consumer financing facilities such as personal loans and credit cards.

According to the prudential regulations, the maximum loan tenure has been reduced from seven years to five years while the minimum down payment for vehicle financing has been raised from 15% to 30%.

The maximum tenure for personal loans has also been revised downward from five years to four years.

On the flip side, the maximum debt burden ratio for a borrower has been reduced from 50% to 40%.

The overall auto financing limit availed by a person from all banks, in aggregate, will not exceed Rs3 million at any point in time.

Due to the stiff regulations, the number of cars sold in the country fell 11% month-on-month to 18,714 units in November 2021, according to data released by the Pakistan Automotive Manufacturers Association (Pama) earlier this month.

 

Published in The Express Tribune, December 21^st, 2021.

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