Auto loans slump for 17th month as interest rates bite

KARACHI: The auto loans fell for a 17th straight month in November as record-high interest rates and a weakening currency deterred consumers from buying new cars, central bank data showed on Tuesday.

Auto financing declined 24.4 percent from a year earlier to Rs257 billion, according to data from the State Bank of Pakistan. There was a minor month-on-month decline of 2.6 percent in these loans in November. The previous month recorded Rs264 billion in auto financing.

In June 2022, auto loans reached the highest level of Rs368 billion. These loans have decreased by Rs111 billion since then. The downward trend in auto financing is primarily attributed to high borrowing costs. The SBP kept its benchmark interest rate unchanged at a record 22 percent on December 12. The central bank has hiked interest rates by a cumulative 15 percentage points since September 2021 to curb soaring inflation.

The macro-prudential measures implemented by the SBP limited auto financing in addition to raising interest rates.

The SBP modified the prudential standards for consumer financing in September 2021 and May 2022 to moderate vehicle loans by raising the down payment required and lowering the maximum financing term.

Furthermore, banks had to get SBP approval in advance in May 2022 to obtain letters of credit for 25 high-value capital goods, including CKD vehicles. The devaluation of the rupee led to a rise in production costs for automobile manufacturers, which in turn reduced demand for automobiles. Thus, car prices were boosted. The purchasing power of consumers has been adversely affected by a rapid rise in inflation.

Although some major assemblers announced price reductions, it seems that their efforts to attract customers fell short of expectations.

According to the latest data released by the Pakistan Automotive Manufacturers Association, car sales fell by 50 percent to 33,638 units in the five months of the current fiscal year. The credit to the private sector, including consumer financing, would expand in the coming months due to anticipated interest rate cuts.

Inflation and interest rates have peaked with easing cycle expected to begin early next year, analysts said. “In response to tapering inflation, analysts expect the SBP to initiate its first rate cut at the beginning of 2024, and then onwards, the real rates will be in a substantially positive territory. We expect the policy rate to fall to 20 percent by the end of FY2024,” said an analyst at Alfalah Securities.

According to data from the SBP, bank loans to the private sector inched down by 0.2 percent in November to Rs8.191 trillion. In November, consumer loans fell by 8.5 percent YoY to Rs825 billion. Personal loans to consumers decreased by 4 percent to Rs246 billion.