Ultimate Guide on Car Financing Setback
State Bank of Pakistan has made significant adjustments in the prudential regulations, in an apparent attempt to control consumer financing in the country, recently as Pakistan is already facing continuous escalating in trade and current account deficit. The financial experts have sharply reacted to this step as they feel that it will have adverse effects and literally going to halt the country’s economic growth.
Pakistan has been running with a consistent trade deficit since 2003 mainly due to high imports of energy. The trade deficit sharply narrowed by 46.76% to $2.64 billion in July 2022 when compared with $4.96 billion in June 2022. The import billion declined by 38% to $4.86 billion in July 2022 as compared with $7.88 billion in June 2022.
Whereas, Pakistan’s current account deficit i.e. the difference between the country’s foreign expenditure and income, narrowed down by a staggering 45% to $1.2 billion in July.
Consumer Credit in Pakistan decreased to Rs1,118,664 million in July from Rs1,123,425 million in June of 2022.
However, SBP’s spokesman has said in a statement that the revised prudential regulations were likely to control import and demand growth. As per the statement, this targeted step will help to moderate demand growth in the economy, leading to slower import growth and thus supporting the balance-of-payments. Other consumer finance facilities, such as personal loans and credit cards, have also been affected. SBP has brought these changes to the financing mechanism for imported and domestically assembled vehicles. The objective is to protect lower to middle-income category purchases, these new regulations are not applicable to locally manufactured or assembled vehicles of up to 1,000 cc engine capacity.
The central bank reduced the maximum auto finance and personal loan tenures from seven to five and five to four years, respectively. The maximum debt burden ratio allowed to a borrower has also been decreased from 50 to 40%. Now the consumers interested in financing cars will now have to make a minimum down payment of 30% instead of 15% in the past and they will not be able to get more than Rs. 3.0 million of financing in an individual capacity.
The Consumer Credit in Pakistan is expected to be Rs9,921,98.00 million by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, Pakistan Consumer Credit is projected to trend around Rs1,097,823.00 million in 2023 and Rs1,152,714.00 million in 2024, according to our econometric models.
| Related | Last | Previous | Unit | Reference |
| Consumer Confidence | 31.60 | 41.46 | points | Jul 2022 |
| Consumer Spending | 36948148.00 | 11242554.00 | PKR Million | Dec 2021 |
| Private Sector Credit | 8194312.00 | 8268256.00 | PKR Million | Jul 2022 |
| Consumer Credit | 1118664.00 | 1123425.00 | PKR Million | Jul 2022 |
Consumer Credit in Pakistan averaged Rs480,393.90 million from 2006 until 2022, reaching an all-time high of Rs1,123,425 million in June of 2022 and a record low of Rs282,406 million in April of 2012. This page provides Pakistan Consumer Credit’s actual values, historical data, forecast, chart, statistics, economic calendar,s and news. Pakistan Consumer Credit values, historical data, and charts were last updated in October 2022.
| Related | Last | Previous | Unit | Reference |
| Consumer Confidence | 31.60 | 41.46 | points | Jul 2022 |
| Consumer Spending | 36948148.00 | 11242554.00 | PKR Million | Dec 2021 |
| Private Sector Credit | 8194312.00 | 8268256.00 | PKR Million | Jul 2022 |
| Consumer Credit | 1118664.00 | 1123425.00 | PKR Million | Jul 2022 |
When interest rates rise, consumer financing is the first to fall. And this happens more frequently in economies where, unlike corporate borrowers, consumer finance seekers cannot afford to service pricier loans.
On the other hand, after a huge increase in interest rates, bankers also put consumer loans on a stricter watch to avoid delayed — or in the worst case — no servicing of such loans.
This twin phenomenon becomes all the more inevitable if interest rate hiking coincides with a declining trend in economic growth.
In the entire FY21, consumer financing grew 32.6 percent or by Rs174 billion, State Bank of Pakistan (SBP) stats reveal. In nine months of FY22 (July 2021 to March 2022), the rate of growth slipped to 20.2 percent. However, volume-wise Rs143 billion worth of new consumer loans were made during this period. Full FY22 consumer financing is expected to reach the previous year’s level of Rs174 billion but the rate of growth would obviously be lower because of a larger base.
After 7th April’s 250 basis points increase in the SBP policy rate — from 9.75 percent to 12.25 percent — all banks have accordingly repriced their consumer loans using the most frequently used six-month Karachi Interbank Offered Rate (Kibor) as the benchmark.
For example, if any bank offers its intending car purchasers that car financing is available at six-month Kibor, which is approximately 15.37 as of Oct. 04, 2022, plus 2.99% plus 1.99 % insurance. It will become 17.86%. Now add to it another 1.99% and you get 19.85%. This means car purchasers will have to pay close to 20% interest. This does not include other additional charges, per annum. This definitely will slow down car financing.
In March 2022, car sales in Pakistan had increased 25% to 27,131 units from 21,664 units in February, according to Pakistan Automotive Manufacturers Association. Cumulatively from July 2021 to March 2022, car sales have grown 52% to 205,381, compared to 134,718 from July 2020 to March 2021, amid COVID. This growth will go down both due to higher interest rates as well as due to the large base effect.
Pakistan’s transport sector imports had increased by 154% during July-August 2021 to $667.7 million with a major contribution of $574 million coming from road motor vehicles.
Pakistan had witnessed how interest rates peaked and the Pak rupee bottomed in the last three years, adding the government’s economic policies had led to a slowdown while inflation continued to stay high. The central bank’s new policy is not applicable to Roshan Apni Car, a vehicle financing facility for overseas Pakistanis.
Keeping this in mind we can anticipate a declining trend in the growth of consumer finance from the April-June quarter — or the beginning of the new fiscal year in July — if higher interest rates start affecting consumer loan demand with a lag of time. That trend may last till the time the economic growth picks up further pace — and, in particular, leads to a rise in the net real income of people — or interest rates become stable for a quarter or two. Or both things happen at the same time paving the way for some monetary easing.
Conclusion
During the last fiscal year (July 2020-June 2021), Pakistan’s economy grew 5.3 percent and consumer financing remained robust. During the current fiscal year due to end in June, the economy is projected to grow somewhere between 4 percent (International Monetary Fund projection) and 4.3 percent (World Bank projection). So far this year, consumer financing growth has remained in double digits but the sign of deceleration is obvious.
The author, Mr. Nazir Ahmed Shaikh is freelance writer, columnist, blogger and motivational speaker. He write articles on diversified topics. Mr. Shaikh could be contacted at nazir_shaikh86@hotmailcom