KARACHI: After showing signs of recovery for two consecutive months, auto financing in Pakistan experienced a slight decline in November. The total financing amount dropped to Rs234.6 billion, down from Rs236 billion in October, according to data released by the State Bank of Pakistan (SBP) on Tuesday.
A Brief Surge in Auto Financing
Auto financing had demonstrated a positive trend in October, recording a 3.7% increase month-on-month compared to September. The financing figure rose to Rs236 billion in October from Rs227.541 billion in September and Rs227.296 billion in August. This surge was driven by:
- Promotional offers by banks and automakers.
- Lower financing costs resulting from declining interest rates.
The auto industry was optimistic about the revival of financing in September after a prolonged slump of 27 months. For context, auto financing peaked at Rs368 billion in June 2022.
Interest Rate Cuts Bolster Potential
The SBP has been gradually reducing its policy rate, which now stands at 13%, reflecting a cumulative decline of 900 basis points in six months.
- June 10: Reduced to 20% from 22%.
- July 29: Further lowered to 19.5%.
- September 12: Cut to 17.5%.
- November 4: Dropped to 15%.
- December 16: Final cut to 13%.
This significant reduction in borrowing costs has the potential to encourage auto financing in the coming months.
Industry Insights and Predictions
- Mohammed Sohail, CEO of Topline Securities, believes the decline in November is temporary. He expects car sales and financing to recover in January as buyers anticipate deliveries of new year models.
- SBP Loan Limits: The Rs3 million cap on auto loans is limiting the market’s potential, according to Sohail. He predicts that car financing will likely improve further with lower interest rates and if this cap is increased.
Challenges in Auto Financing
Several restrictive policies have affected the growth of auto financing:
- Loan Caps: The SBP’s limit of Rs3 million on auto loans.
- Shorter Loan Tenures:
- Up to 1,000cc cars: Maximum tenure of five years.
- Below 1,000cc cars: Maximum tenure of three years.
- Higher Down Payment: Minimum 30% down payment required for financing.
- High Interest Rates: Although now easing, high rates previously suppressed demand.
Future Outlook: Potential Policy Changes
A report by Insight Securities highlighted the improving economic landscape, including better foreign exchange reserves and external accounts. This creates room for the SBP to relax some of its restrictive conditions on auto loans.
- Proposed Increase in Loan Limits: Media reports suggest the SBP may raise the auto financing cap to Rs6 million. If implemented, this could act as a catalyst for car sales growth.
Auto Sales on the Rise
Despite challenges in financing, overall sales of cars, SUVs, vans, and pickups surged by 51% during the July-November 2024 period, reaching 50,856 units compared to the same timeframe last year.
Conclusion
While the dip in auto financing during November raises concerns, industry experts remain optimistic about recovery in early 2025. A combination of easing interest rates, potential policy changes, and strong demand for new vehicles could pave the way for sustained growth in Pakistan’s auto sector.
