Auto financing drops for 14th straight month in August

KARACHI: Bank credit to individuals purchasing automobiles fell for the 14th consecutive month in August as auto demand retreated on the back of higher interest rates.

According to the data from the State Bank of Pakistan (SBP) released on Monday, auto loans decreased by 2.5 percent month-on-month to Rs278 billion in August. In the previous month, these loans totalled Rs285 billion.

August saw a 21.1 percent year-on-year decline in auto financing. In the same month last year, consumers borrowed Rs353 billion from banks to buy cars and other vehicles.

In June 2022, auto loans reached a height of Rs368 billion. These loans have fallen by Rs90 billion since that time due to the rising borrowing costs exacerbated by the recent economic turmoil.

Analysts stated that increased interest rates and different SBP measures to reduce auto demand are preventing consumers from obtaining autos through bank financing. Along with higher loan rates, the depreciation of the rupee versus the dollar raised car prices. Soaring inflation has badly impacted the purchasing power of consumers.

Analysts predict that the auto industry will continue to be somewhat in crisis through December and that the sales scenario may remain concerning even into 2024 if there is no indication of a significant decline in interest rates, prices, or exchange rate stability.

The SBP left the policy rate unchanged at 22 percent in its meeting on September 14. It has hiked interest rates by a cumulative 15 percentage points to 22 percent since September 2021.

According to the latest data released by the Pakistan Automotive Manufacturers Association, automobile sales increased by 49 percent month-on-month in August to 7,579 units, but decreased by 36 percent year-on-year. In August 2022, 11,789 units were sold.

The SBP’s data showed that bank loans to the private sector fell by 1.1 percent to Rs7.96 trillion in August. These loans stood at Rs8.05 trillion in the same month last year.

Consumer loans also decreased 5.4 percent to Rs846 billion in August from Rs893 billion a year earlier. Amongst consumer lending, personal loans fell 1 percent year-on-year to Rs248 billion. However, house building loans rose 1.7 percent to Rs209 billion in August.

The SBP, in its review of the banking sector, said the consumer finance segment, which constitutes 6.9 percent of banks’ domestic loan portfolio, posted a net retirement of Rs47.4 billion in the first six months of 2023.

“Auto financing observed retirement of Rs44.9 billion, driven by high interest rates and the lag impact of macro prudential measures which were taken during CY21,” it said.

“Importantly, mortgage loans, constituting 25.2 percent of total consumer loans, also gradually lost momentum, as the concessional finance scheme for low-income groups that particularly augmented the growth of mortgage finance in recent quarters was suspended in June 2022,” it added.