Auto Loan Decline: Challenges and Outlook
In Karachi, data from the State Bank of Pakistan (SBP) revealed that outstanding auto loans dwindled for the fourth consecutive month, registering a notable decline at the end of October. Auto Loan Decline: Challenges and Outlook
At Rs345 billion, outstanding auto financing saw a 0.1% decrease compared to October 2021’s figure of Rs346 billion. Moreover, the latest data indicates a 1.4% drop from its level in September 2022.
Several factors contribute to this decline, including a substantial surge in car prices, elevated interest rates, SBP measures to curb auto financing, plant shutdowns due to import restrictions, and vehicle delivery delays. These challenges have prompted potential buyers to defer their purchase decisions.
Notably, certain assemblers, particularly Chinese and Koreans, are now offering ready delivery of vehicles on full payment after clearing imported auto kits from the port. Despite this, the high prices and a recent significant increase in the key interest rate may still pose obstacles to their sales.
Samiullah Tariq, Head of Research at Pak Kuwait Investment Company Ltd, explained, “The government aims to suppress auto demand by limiting imports of parts and accessories to support the delicate balance-of-payment situation.” Auto Loan Decline: Challenges and Outlook
With a recent 100 basis points hike in the key interest rate to 16%, Tariq predicts that auto demand will likely remain low for at least the next year. A potential revival may occur if the key interest rate decreases by three to four percentage points in the coming months.
Auto Industry Challenges Unveiled
Tariq Stresses on Rising Interest Rates
Amidst economic shifts, Tariq underscores the drastic increase in the benchmark interest rate, soaring from 7.25% in September 2021 to the current 16%. This surge compels consumers to grapple with elevated monthly auto loan installments.
Buyer Retrenchment Reflects in Auto Sales
Buyers are conspicuously scaling back on new car acquisitions, as evidenced by a substantial decline in auto sales. Figures plummeted from 74,952 units a year ago to 39,700 units in July-October. Sales of pickups and jeeps also dwindled from 14,969 units to 8,234 units during the same period.
Concerns Escalate Over Surging Car Prices
A major worry for buyers revolves around a staggering 40% average increase in car prices since September 2021. Notably, the Honda City manual, priced at Rs3.77 million, witnessed a significant surge from Rs2.59 million in September 2021.
Auto Financing Faces Hurdles
Auto financing grapples with additional challenges, including an upper limit of Rs3 million on auto loans aimed at curbing the sale of expensive vehicles. Furthermore, there is a reduction in the auto loan repayment tenor. The State Bank of Pakistan (SBP) also lowered the debt-burden ratio (DBR) from 50% to 40%, necessitating monthly auto loan payments to account for 40% or less of one’s income, down from the earlier threshold of 50%.
PAAPAM Chairman Highlights Industry Impact
Munir Bana, Chairman of the Pakistan Association of Auto Parts and Accessories Manufacturers (PAAPAM), sheds light on adverse factors affecting the local tractor parts industry. Heavy floods, hyperinflation, a rising dollar rate, import restrictions, and political uncertainty have collectively resulted in a production drop due to a significant fall in tractor sales.
