Auto loans up 19pc in Dec as low interest rates speed up demand

KARACHI: Auto loans increased by 19 percent or Rs41 billion in December 2020 as lower bank lending rates and pickup in economic activity after the lockdown compelled the consumers to buy new and used vehicles.

Loans for transport such as purchase of cars stood at Rs256 billion in December, compared with Rs215 billion in the same month of the previous year, the central bank data showed on Tuesday.

One reason people borrowed to buy vehicles was the higher demand of passenger cars, particularly in the 1300cc and above category. A renowned auto assembler introduced a new variant of passenger car in the 1300cc and above category, which was well received by the market.

Another factor for the increase in auto finance was explained by the low interest rate environment. The State Bank of Pakistan cut interest rates by 625 basis points to 7 percent last year.

Soft interest rates have decreased the volume of monthly instalments of car financing products.

The jump in the prices of locally produced vehicles’ did not restrain consumers from buying cars.

Economic activity is gaining momentum as all the businesses, factories and shopping malls remain open, despite the second wave of the coronavirus pandemic in the country. This is evident from the car sales numbers as well.

Car sales, as reported by Pakistan Automotive Manufacturers Association (PAMA), increased by 15 percent year-on-year in December 2020 to 13,870 units. The same, including Lucky Motor Corporation (KIA, non-member of PAMA), is up by 20 percent YoY.

Consumer financing rose to Rs618.6 billion in December from Rs555.8 billion a year ago.

Consumer financing posted a net retirement of Rs6.4 billion in FY2020, compared with an increase of Rs57.3 billion in FY2019. Consumers perceived last year as challenging when it came to borrowing from banks to finance their spending on house building, car purchases and other consumer items, as interest rates remained in double digits through most of the period. The overall consumer confidence also remained weak amid high inflation and weak economic activity.

The major drag came from housing and auto financing segments, which posted negative growths of 9.3 percent and 4.3 percent, respectively.

Analysts said the availability of vaccines in Pakistan, strengthening economic recovery and positive consumer sentiments would boost auto demand, increasing car financing in the coming months.