Auto Financing Reaches Its Lowest Level in 16 Months

The third disclosure in less than a month highlights a continuing decline in the country's car sector, providing yet another update on its shifting conditions. After a series of statistics that showed a dramatic drop in both automobile sales and Completely Knocked Down (CKD) imports, attention is now directed against the auto lending industry.

In a notable development, Pakistan's outstanding vehicle loan balance has been falling for 16 straight months, with data expected to hit Rs264 billion by the end of October.

The sales of automobiles, light trucks, vans, and pickups dropped significantly in the first four months of the fiscal year 2023, from 48,573 units to 27,163 units, a 44 percent decrease from the same time the previous year. This dip in sales was accompanied by a decline in auto loans.

Rising costs and costly vehicle financing were blamed for this decline in demand. Assemblers also had difficulties since SBP limitations on establishing letters of credit for imports regularly resulted in component shortages that forced output to be stopped for more than a year.

Vehicle finance was further discouraged by the introduction of an upper limit of Rs. 3 million on vehicle loans, along with a reduction in the payment length. The rupee's strengthening caused several Korean and Japanese assemblers to lower their pricing, but not Pak Suzuki Motor Company Ltd. (PSMCL). Despite this, the market as a whole remained sluggish.

Root Causes

This represents a notable 23.5 percent fall year over year and a 3 percent decrease month over month. The State Bank of Pakistan (SBP) has been implementing several economic policies to combat inflation and external imbalances, which are responsible for the changing dynamics.

In June 2022, the country's vehicle loan peak was recorded at Rs 368 billion. Nonetheless, there has been a significant decline of Rs104 billion, or 28%, during the last 16 months. The tightening of the SBP's monetary policy was a major factor in this decline.

Correlation with Auto Sales

There is a clear negative correlation between the drop in auto loans and the sales of automobiles, light trucks, vans, and pickups. Compared to 48,573 units during the same period last year, sales fell by 44% to 27,163 units in the first four months of fiscal year 2023.

Industry Challenges

The car industry has declined further as a consequence of assemblers' challenges, which are made worse by frequent production halts brought on by shortages of parts as a result of SBP limitations on obtaining letters of credit for imports.

The deterrent associated with vehicle financing has increased due to the implementation of an upper limit of Rs. 3 million on auto loans as well as a shorter payment period. The market is still slow even though some Japanese and Korean assemblers—apart from Pak Suzuki Motor Company Ltd.—have responded to the rupee's rise by cutting prices.

Stakeholders in the car finance industry are closely observing any indications of recovery and evaluating the possible effects on the overall economy while the industry struggles with these issues.

Arifa Hussain

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