Used vehicles: SBP’s age-limit relaxation to generate economic activity

Analysts believe decision will help masses get cheaper cars.

KARACHI:

The State Bank of Pakistan’s (SBPs) move to increase the age limit – from five to nine years – on cars that can be financed is not only going to help the masses but also increase economic activity in the country, analysts said on Friday.

The SBP eased the restriction, stating that models, which are upto nine years old, can be financed through commercial banks. Analysts and car dealers said the move will help increase the sales of used cars as people can now buy the lower-end models with lesser down payment.

However, according to SBP, cars older than five years and up to nine years can only be financed subject to the condition that complete repayment of financing is restricted within 12 years of the car’s age.



“The SBPs initiative is in line with our request that was made earlier,” said All Pakistan Motor Dealers Association (APMDA) Chairman H M Shahzad. “The decision would have had a greater impact had it been taken earlier when the imported used car age limit was five years.”

The current imported used car age-limit is three years, which was five around 18 months ago.

“This is expected to increase the sales of older models, but it will not make any difference for the three-year-old ones as they were already being financed by banks,” he added.

Car dealers said this relaxation would create visible difference if the government allowed the import of five-year-old used cars in the country.

In the outgoing fiscal year 2014, car imports have sharply declined 51%, mainly due to the reduction in the age limit of the imported used cars from five to three years in December 2012. This was the second consecutive year when the country saw a decline in the import of cars. Pakistan imported just 22,220 units in 2014 compared to 45,378 units in 2013.

“The central bank’s move will allow people to get financing for economical cars as low as Rs0.3 million. This will be helpful for those who do not buy cars with a price tag of over Rs0.5-0.6 million,” said Emerging Economics Research MD Muzammil Aslam.

At present, the cost of a five-year-old locally assembled 800cc car is not less than Rs0.5 million, which according to analysts, discourages many to opt for car financing.

Another analyst pointed out that the double-digit interest rate is the biggest factor in discouraging car financing. Currently, car financing even for new cars is around 18-20% of the total new cars sold in the country.  Amid such a low percentage of people opting for financing new cars, the number goes even lower when one looks to buy an older model, the analyst added.

When General Musharraf was in power, car financing reached as high as 50%, mainly due to the single-digit interest rate in the country. However, that heavy car financing period also created problems for the banks when their non-performing loans ballooned later on.

“It seems that the central bank wants to increase consumer financing which has remained depressed in previous years. Now that the government is not borrowing much from banks, they have much more cash at hand to lend to the private sector,” Aslam added.

Published in The Express Tribune, July 26^th, 2014.

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