Auto loans fall for 18th month as interest rates bite

KARACHI: The auto loans declined for the 18th consecutive month in December, as high-interest rates and a weak economy dampened consumer demand for cars, central bank data showed on Thursday.

Auto loans dropped to Rs251 billion in December, down 25.6 percent from a year earlier, data from the State Bank of Pakistan showed. The loans fell 2.3 percent from November, when they totaled Rs257 billion.

However, analysts are optimistic that this downward trend will reverse in the coming months as demand for car loans may rise in response to potential interest rate cuts and ease in inflation pressures.

Auto loans hit a record high of Rs368 billion in June 2022. Since then, the amount of these loans has dropped by Rs117 billion.

Low consumer spending power amid skyrocketing inflation, costly auto financing, and rising car prices are some of the factors causing the fall in these loans. The SBP kept its benchmark interest rate unchanged at a record 22 percent last month. The central bank has hiked interest rates by a cumulative 15 percentage points since September 2021 to combat surging inflation.

In addition to increasing borrowing costs, the macroprudential regulations put in place by the SBP restricted auto finance. In September 2021 and May 2022, the SBP changed the prudential rules for consumer finance to moderate auto loans by lowering the maximum credit period and increasing the required down payment.

In May 2022, banks were also required to acquire SBP approval in advance to receive letters of credit for 25 high-value capital goods, which included CKD vehicles. The rupee's depreciation increased production costs for automakers, which in turn decreased demand for automobiles. Car prices increased as a result.

According to the latest data, car sales increased to 10,500 units in January, up 81 percent from the previous month. The buying impact of the new year, the relaxation of import restrictions, and the rise in affordability brought about by falling automobile costs were all cited by analysts as reasons for the January sales boom.

As interest rates are expected to drop in March, which would improve auto financing, they expect a continued rebound in sales. However, car sales declined by 48 percent to 49,990 units in the seven months (July-January) of the current fiscal year.

According to SBP data, loans to the private sector totaled Rs8.5 trillion in December, up 4.3 percent from the previous month but down 1.4 percent from a year earlier. In December, consumer financing was Rs818 billion, a 9.1 percent year-on-year decline.