Noor Israr looks at the exorbitant rates of auto finance
The unprecedented inflation in the country has very badly affected the once fast-increasing business of Prohibitive auto-finance that greatly facilitated mobility in Pakistan. Auto-finance was put in place for a longer duration making it possible for Pakistanis to own their vehicles after a very long time since this facility came into play. Pakistani banking system was cited not to be robust enough to offer loan facility along with the apparent lack of trust in the ability of Pakistani citizen to be able to adequately pay back regular installments. However, once this facility was extended the banks never looked back and the business progressed. In the current financial situation it appears that the dreaded prospect of Pakistanis lacking the ability to pay back the amount lent for buying a vehicle has raised its ugly head simply because of the very high installment amounts.
The difficult situation faced by the auto-finance in Pakistan can be gauged from the fact that after a meteoric price hike in prices of most vehicles in the last few months followed by an increase in the interest rate, many potential buyers have finally decided to shelve their plans for buying vehicles. The additional difficulty is the recent 1.5 per cent raise in the interest rates that now stand at 13.75 per cent making auto-finance extremely expensive. The situation is further aggravated by banks reducing tenure of financing from five to three years on above 1,000cc vehicles, making monthly installments unmanageable. Cutting the tenure to three years from five means a buyer has to manage an extra monthly amount amid the looming uncertainty of further hikes in interest rates, rising prices, and more curbs on auto financing to control the current account deficit.
The negative results have become obvious from the statistics that show consumer auto financing shrinking to 20 per cent after the State Bank’s revised prudential regulations. Locally assembled vehicles less than 1,000cc vehicles could be financed with minimum 30 per cent equity instead of 15 per cent and tenure also revised to five years from seven-years. These changes imply that the debt burden ratio cap of 40 per cent and a minimum down payment of 30 per cent make it impossible for an average middle-class person earning Rs.100,000 per month to obtain car financing. Above 1,000cc vehicles can be financed with a cap, but the tenure will be three years rather than five. Changes in tenure and the cap on aggregate debt burden ratio are impacting businesses directly, which is actually problematic for the middle class person who wants to get a car on financing.
It is reported that the impact of KIBOR would be definitely revised after six months or 12 months, whichever comes first but the capping of debt burden, limitations of aggregate exposure and maximum down payment with minimum tenure are directly affecting auto finance businesses. With already high food inflation and a further possible price hike in essential items after a massive increase in petroleum prices, it would further make the household budget of consumers more difficult to manage and would make them more reluctant to take car financing. The vehicle assemblers are a bit relaxed now due to the pile up of advance bookings in their hands whose delivery time ranges between two to nine months. The impact of high interest rates and shorter month-to-month durations will undoubtedly be felt in the coming months.
Many bankers dealing in auto financing said the footfall of consumers to the bank for auto financing has drastically plunged after a recent hike in the policy rate. Besides, the ban on used car imports has put another dent in auto financing. They mention that the bank is charging 18 per cent interest rate as compared to 14 per cent that will be difficult for many consumers to afford. As the new locally-assembled cars are getting pricier multiple times in a year, the second hand vehicles’ market will continue to bear the brunt. The demand for used vehicles has increased substantially as a number of people are unable to afford to buy costly locally-assembled cars.
As a result of high demand, the prices of used cars have also risen to a level with locally-assembled cars. Demand for used and even 660cc-1,000cc cars is likely to further escalate after Rs.30 per litre jump in petrol prices, while more price shocks are on the cards. A three-year-old locally-assembled Honda Civic is now selling for Rs.4 million but a new one now costs over Rs.6 million. That is far more expensive anyway as the average price of a used vehicle is not less than Rs.1.9 million which used to be Rs.1.1 million three years back. Many dealers now report that they receive purchase enquiries from buyers in the price range of Rs.1.5 million for small cars to Rs.3.5 million for high-engine power used vehicles of 2014 to 2017 models whereas three years back, their prices ranged between Rs.1 million to Rs.2.5 million. TW