Car financing via banks drops by Rs8b
During the meeting, the chairman emphasised the need for recovery of the arrears. PHOTO: file
Demand for car financing through banks has dropped for the second consecutive month, falling 2.2% (or Rs8 billion) on a month-on-month basis to a seven-month low at Rs353 billion in August, in the wake of corrective measures to cool down the overheated economy.
Cumulatively, financing has reduced by 4.1% (or Rs15 billion) in the past two months to Rs353 billion in August, compared to all-time high hit at Rs368 billion in July 2022, reported Arif Habib Limited (AHL) citing the central bank data on Tuesday.
An analyst said car financing rates have fallen following the government tightening conditions for bank financing and strict measures imposed on the import of non-essential, luxury items in an attempt to reduce the country’s inflated import bill.
To recall, the overall import bill hit an all-time high at $80 billion in the previous fiscal year ended June 30, 2022. This caused a sharp depletion in the country’s foreign exchange reserves and significantly depreciated the value of the rupee against the US dollar.
Explaining the steps taken over the past few months that has led to this drop in car financing rates the analyst said, “Since the past few months, the government has imposed a complete ban on the import of cars over Rs3 million,” recalled the analyst. “In fact, assemblers are required to take the central bank’s approval before placing import order, which is a time-consuming job spanning across 45-60 days. This has also impacted car assembly and sales in the country,” he said.
Secondly, the authorities concerned increased the amount of down payment and reduced financing limits in relation to monthly income.
A massive rupee depreciation of 30% in the previous fiscal year 2022 to Rs205 against the US dollar also jacked up import prices of cars and their parts. Car assembly reciprocated by passing on the rupee depreciation impact to buyers by increasing vehicle prices. Later on, however, they cut the prices notably.
More importantly, the State Bank of Pakistan (SBP) increased its key policy rate by 800 basis points in 11-month (September 2021 to July 2022) to 15% at present. The primary objective was to control high inflation readings and slow down economic growth to cool an overheated economy. The action, however, made car financing so expensive that customers became discouraged buying a car on bank financing.
The government also increased import duties on cars and their parts a couple of times to reduce the overall import bill, and stabilise reserves and the rupee.
Together, all the corrective measures taken force a decline in auto sales (cars, LCVs, vans and jeeps) to a 26-month low at 11,600 units in August 2022.
According to the Pakistan Bureau of Statistics (PBS), the country imported vehicles including cars, busses, aircrafts and ships worth $4.46 billion in the previous fiscal year 2022, that was 49% higher compared to the $2.98 billion imported in the prior fiscal year 2021.
Imports dropped by 37% to $421 million in the first two-month (Jul-Aug) of the current fiscal year 2023, compared to $667.5 million in the same two-months last year. However, the import of busses for routes, including the green line and orange line, has continued to make a notable contribution to the transportation group.
Published in The Express Tribune, September 21st, 2022.
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