Inflation dent: Auto financing slumps

Net automotive loans saw a reduction of 1.4 percent on month-on-month basis in October, representing fourth consecutive month downward trend, shows the latest credit data released by the State Bank of Pakistan.

This 1.4 percent decrease amounts to Rs4.9 billion contraction, as the first four months (July-October) of the FY 2022-23 with a total reduction of Rs22.658 billion. It is a 160 percent year-on-year decrease when compared with the same period of FY 2021-22.

Meanwhile, the outstanding automotive credit stood at Rs345.186 billion in comparison to Rs350.1 billion in September.

However, the negative value does not mean the banks did not engage in any lending. A negative value denotes that the number of loans that have matured exceeds the number of fresh loans that have been taken out.

According to experts, auto production and financing are influenced by supply and demand fundamentals, and require both time and a more conducive economic environment to recover.

They believe there are still pockets of unique clients, including non-resident Pakistanis, targeting both new and used cars.

However, the uptake of auto financing is also linked to inflation-driven fears, which forces a large number of consumers to carefully re-assess economic choices, focusing expenses on essentials.

The State Bank’s recent policy rate hike by 100 bps to 16% has led to the exchange rate to rise to a 12-year high. One of the main reasons for decrease in fresh automotive loans, alongside with the State Bank’s amended prudential requirements, was the prevailing cost of borrowing. This new increase is likely to increase the month-on-month net decreases in the months to come.

Moving beyond the reduction in fresh loans, there is also the possibility that more customers are choosing to rid themselves of their outstanding payments. This is likely due to the increase in the cost of living and/or the possible increase in the cost of repayment that customers are likely to experience as a result of increase in KIBOR.

According to some estimates, the average auto loan has a life of 48 months. It’s an inverted curve so the principal repayments accelerate over time. The interest repayment is greater than the principal in the initial part of the loan but as the loan goes past 18-20 months then the principal portion decreases very rapidly.

If new loans do not increase then these dips will likely increase as the principal for the Rs97 billion automotive loans will start being serviced.

Meanwhile, it is said that the auto sales are going to remain suppressed during the next 12 to 18 months unless something fundamentally changes.


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