KARACHI: The amount of outstanding auto loans decreased for the third consecutive month at the end of September, data released by the State Bank of Pakistan (SBP) showed on Wednesday.

The outstanding financing for vehicles stood at Rs397.4 billion at the end of last month, down roughly Rs2bn from August.

The month-on-month decline becomes more pronounced by excluding the auto loans that banks extended to their own employees.

Auto financing has shrunk by more than Rs17bn or 4pc since the beginning of 2022-23.

Speaking to Dawn, Pak-Kuwait Investment Company Ltd Head of Research Samiullah Tariq said there’re three major reasons for a continuous drop in auto financing.

One, car prices shot up as soon as the government and the SBP took measures to restrict the outflow of dollars by curbing imports.

New cars became prohibitively expensive because local assembling depends heavily on imported kits and parts.

Two, rising inflation prompted the SBP to increase the policy rate, which serves as benchmark for all consumer loans. Interest rates nearly doubled, discouraging potential car buyers from making new purchases through bank loans.

The third reason for the decline is that the SBP rolled out a set of measures specifically meant to reduce car financing, Mr Tariq said.

For example, the SBP reduced the debt-burden ratio from 50pc to 40pc last year. This means the monthly auto loan payment can account for 40pc of one’s total income as opposed to the earlier threshold of 50pc.

Similarly, the SBP imposed an upper limit of Rs3 million on an auto loan to ensure that people don’t avail car financing to buy high-end vehicles.

In addition, the SBP also reduced the auto loan repayment tenor while doubling the minimum down payment required for a bank-financed vehicle.

“All these measures, along with high inflation, have contributed towards dampening the demand for auto financing in recent months,” he said.

Mr Tariq said banks are extending car loans at 4-5pc above the Karachi interbank offered rate (Kibor), which is the benchmark used by banks in the wholesale money market.

Given the prevailing Kibor rate of roughly 15.6pc, the average car buyer is paying an interest rate of roughly 20pc on a bank-financed vehicle.

“I think auto financing will remain low at least for the next six months given the prevailing macro-economic numbers,” he said.

Analysts believe the drop in auto financing is partly responsible for the overall decline in car sales, which shrank 7pc on a month-on-month basis to about 13,000 units in September.

Published in Dawn, October 20th, 2022