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Tuesday February 27, 2024

Auto loans hit record high in Dec defying consensus calls

January 19, 2022
Auto loans hit record high in Dec defying consensus calls

KARACHI: Despite tighter interest rates and regulative curbs, car loans hit a new high in December 2021, defying expectations of a fall, as buyers rushed to get deliveries before approval of the minibudget so that they have to pay less taxes.

Auto loans increased 1.3 percent to Rs353.64 billion in the last month of the outgoing year over November 2021, while they jumped 38 percent compared to December 2020, according to State Bank of Pakistan (SBP) data.

Arsalan Hanif, Research Analyst at Arif Habib Ltd, said auto financing was expected to come down because of increasing interest rates and State Bank’s restrictions.

“However, unexpected [rise in] demand in December jacked up auto financing too,” Hanif added.

As per the numbers shared by Pakistan Automotive Manufacturers Association (PAMA), car sales grew 96 percent to 27,300 units in December over same month last year.

The SBP has increased the policy rate to 9.75 percent. It also mounted restrictions on auto financing in September last year to contain rising demand in an effort to curtail soaring current account deficit.

It is because local auto industry uses a high level of imported parts, whereas locally manufactured auto parts also have a high reliance on imported raw material.

The central bank increased minimum down payment cap to 30 percent from 15 percent; reduced maximum auto loan repayment tenor from seven years to five years, slashed debt-burden ratio from 50 percent to 40 percent, and also limited maximum auto loan to Rs3 million. These restrictions, however, don't apply on cars below 1000cc engine size.

According to industry officials, the number of cars purchased through auto financing are between 30 percent and 40 percent of total cars sold in the country.

“The sales in December grew because of the uncertainty over taxation on cars due to the mini-budget. People didn’t want to pay more in taxes if the mini-budget was passed. So they flocked to car dealerships to demand on-time delivery of their cars in December,” Hanif added.

“Banks pay a major chunk of the car financing payment on behalf of their customers to car companies on delivery of cars,” Hanif said adding that high sales in December were also reflected in auto financing.

The Arif Habib Ltd analysts expects the trend of increasing auto finance to continue in January as the mini-budget is yet to get final nod and people are demanding delivery of cars on time so that they don’t end up paying more in taxes.

“There is also new-year euphoria as people normally try to get their cars delivered in January to drive the newest model possible,” Hanif said.