Auto financing reaches record high in Sept

KARACHI: Auto financing reached all-time high in Pakistan in September, as total auto loans extended by banks reached Rs338 billion, which is 45.5 percent higher as compared to the same period last year.

This Rs338 billion figure represents aggregated auto financing portfolio of banks in the country in the month of September. It is 3.8 percent higher from August 2021, when total auto financing in the country stood at Rs326 billion.

Industry experts said the reason for high auto financing was low interest rates in the country.

The interest rate stands at 7.25 percent at the moment in Pakistan. Different banks charge different spread above a common KIBOR rate.

Consumers could be paying between 9.5 percent to up to 11 percent interest on auto loans at the moment. It was at historic high at around 17 percent last year, when policy rate stood at 13.25 percent. The policy rate was brought down to 7 percent after quick rounds of reduction amid economic crisis due to the coronavirus pandemic.

“I think people will continue to avail auto financing until interest rates remain in single digit,” said AHL Research Analyst Arsalan Hanif.

“But the State Bank’s recent restrictions on auto financing and rising interest rates may bring the auto financing number down.”

Industry experts put the number of cars purchased through auto financing between 30 percent and 40 percent of total cars sold in the country.

The State Bank recently increased restrictions on auto financing such as increasing the minimum down payment cap to 30 percent from 15 percent; reduced maximum auto loan repayment tenor from seven year to five years; reduced debt-burden ratio from 50 percent to 40 percent; and also limiting maximum auto financing loan limit to Rs3 million. But this doesn’t apply on cars below 1000cc engine size.

The central bank took this initiative to control auto parts and CKD imports by reducing demand for cars subsequently expecting trade deficit to decrease.