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Auto financing falls for the fourth month in a row

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KARACHI: The amount of outstanding auto loans decreased for the fourth consecutive month at the end of October, according to data released on Monday by the State Bank of Pakistan (SBP).

At the end of last month, outstanding auto financing stood at Rs345 billion, 0.1 percent less than the October 2021 figure of Rs346 billion. The most recent outstanding auto financing figure is 1.4 percentage points lower than the September 2022 level.

Massive price increases, soaring interest rates, various SBP measures to slow down auto financing, plant shutdowns of various assemblers in recent months due to import curbs, and delays in vehicle delivery have forced buyers to postpone their purchase decisions.

However, some assemblers, particularly Chinese and Koreans, have recently begun offering ready delivery of vehicles on full payment after the port clearance of their imported auto kits. However, high prices and a significant increase in the key interest rate last month may continue to stymie their sales.

“The government does not want to keep auto demand high.” As a result, it is attempting to reduce imports of parts and accessories in order to help the fragile balance-of-payment situation,” said Pak Kuwait Investment Company Ltd Head of Research Samiullah Tariq.

He expects auto demand to remain low for at least the next year if the SBP raises the key interest rate by 100 basis points to 16 percent. It could resurface if the key interest rate falls by three to four percentage points in the coming months, he added.

Mr Tariq stated that the benchmark interest rate has more than doubled to 16.25 percent from 7.25 percent in September 2021, forcing consumers to pay higher monthly auto loan payments.

He added that buyers have also limited their purchases of new cars, as evidenced by a significant drop in auto sales, which fell to 39,700 units in July-October from 74,952 units a year ago. Pickup and jeep sales fell to 8,234 units in the same four months from 14,969 units the previous year.

One of the main sources of concern among buyers is a 40% increase in car prices since September 2021.

For example, the Honda City manual is now priced at Rs3.77 million, up from Rs2.59 million in September 2021.

Auto financing also faced other challenges, such as a Rs3m loan limit to limit the sale of expensive vehicles, as well as a reduction in the auto loan repayment tenor.

Last year, the SBP reduced the debt-burden ratio (DBR) from 50% to 40%. As a result, the monthly auto loan payment must now be 40% or less of one’s income, rather than the previous 50%.

Heavy floods, hyperinflation, rising dollar rate, import restrictions, and political uncertainty, according to Pakistan Association of Auto Parts and Accessories Manufacturers (PAAPAM) Chairman Munir Bana, have impacted the local tractor parts industry, which is facing a production drop due to a drastic drop in tractor sales.

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