Auto financing shrinks sharply amid rising interest rates

Published April 7, 2019
"The share of auto loans has fallen from almost 35pc of the total invoicing to 20pc since January."— Reuters/File
"The share of auto loans has fallen from almost 35pc of the total invoicing to 20pc since January."— Reuters/File

KARACHI: Amid rising interest rates and the declining value of rupee, the share of financing in total auto sales has decreased to 20 per cent from the 30-35pc in the last fourteen months.

Chief Executive Officer and Partner Honda Drive-In and Honda Quaideen Shabbir Alibhai said the share of auto loans has fallen from almost 35pc of the total invoicing to 20pc since January, 2018. Moreover, the cost of vehicles in just one year has increased by almost 10-12pc followed by over 20pc in higher engine capacity vehicles.

He said the rates on auto loans have also jumped to 16pc from 11pc after the SBP’s hike in discount rates. Moreover, as the criteria to sanction auto loans is based on salary income or business income, the impact of rising rates and inflation on the cost of living has hampered consumer’s affordability to pay monthly installments. Subsequently, the banks are reluctant to offer auto loans, he added.

Alibhai said that banks used to invest in vehicle booking when the average time period for deliveries ranged between 4-6 months. With immediate delivery — a period of 60 days — the need to invest is no more attractive to them as the cost of investment was covered in their mark-up and customers benefited from immediate deliveries. Some assemblers have begun offering vehicle deliveries within one month.

He said that as rising costs bite, more and more consumers prefer using their existing models.

The State Bank of Pakistan (SBP) raised interest rate from 6pc in January, 2018 to 10.75pc in the last month’s monetary policy announcement. The bank in its second quarterly report for the fiscal year 2018-19 illustrated that 3.6pc contraction in the auto production during the six months can be traced back to a multitude of factors.

The SBP points out that currency depreciation — especially in the Japanese yen and rupee — have increased the overall cost of production and the automobile assemblers have subsequently passed the impact of depreciation on the customers. For instance, auto prices increased by 18.4pc during the calendar year 2018 compared to a marginal rise of 4.8pc in 2017.

Second, an increase in financing cost due to policy rate hike has also had a significant impact on vehicle demand. Auto financing declined by Rs9 billion to Rs11.7bn during the July-December period, showing a year-on-year fall of 43.5pc.

As per calculation relating to the impact of price hike and interest rates for a typical customer, the financing cost per month increased by Rs10,476 per month, which proved to be high for borderline consumers, the SBP report highlighted.

Offering a different view, Pak Suzuki Motor Company Limited Spokesperson Shafiq Ahmed Sheikh said that from January to June, 2018, the average share of auto-financing was 25pc of total auto sales, which then plummeted to 16pc from July 2018 to February following the ban on the purchase of vehicles by non-filers.

However, he confidently claimed that the situation has turned around pointing out that “the share of auto financing in our cars has again climbed to 28pc since the government gave a go-ahead signal to non-filers to purchase vehicles of all engine power.”

He explained that since most of Suzuki’s models are of 1,000cc — the impact of cumulative per month installment cost on consumers is somewhat minimal due to low prices compared to costly 1,300cc to 1,800cc models.

The PML-N government in July 2018 banned non-filers from purchasing vehicles but the incumbent government in January partially removed the ban by permitting non-filers to purchase vehicles up to 1,300cc and later lifted the entire ban in March.

However, while simultaneously removing the ban, the government also raised federal excise duty (FED) on vehicles above 1700c from March 11 which did not hurt Toyota or Suzuki but affected Honda models including Civic — which contributes around 30pc of the total sales under the Honda banner.

However, Adviser to Prime Minister on Commerce Abdul Razak Dawood had recently hinted at removing the 10pc FED during the ongoing month.

Honda auto dealer Shabbir Alibhai said the decision to withdraw FED would be a welcome decision for manufacturers as well as consumers. “The government kills the goose and then wonders where the eggs will come from,” he added.

Locally assembled vehicles saw multiple price hikes from January 2018 to April 1 on account of local currency’s devaluation against the dollar followed by FED hike.

Published in Dawn, April 7th, 2019

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