SBP reduces auto loan tenures to slow down demand

KARACHI: The further reduction of auto financing tenures by the State Bank of Pakistan (SBP) on Tuesday, a day after the policy rate was jacked up to 13.75 per cent, will hit the booming sales of cars and SUVs, auto stakeholders fear.

An assembler said auto sales could fall by 20-25 per cent in FY23 after SBP’s curbs on auto financing, high vehicle prices and record high-interest rates. The auto industry has been enjoying impressive sales growth owing to huge backorders and long delivery periods stretching up to 11 months in some models.

The SBP on Tuesday issued a revised Prudential Regulations for Consumer Financing (PRCF) in which the maximum tenure of auto finance facility is reduced from five years to three years for vehicles above 1,000cc engine displacement and from seven years to five years for vehicles up to 1,000 cc engine displacement.

The central bank said other amendments issued earlier, vide BPRD Circular Letter No. 29 dated September 23, 2021, would henceforth be applicable on financing for all locally assembled/manufactured vehicles, including on financing for vehicles of up to 1,000cc engine displacement and locally assembled/manufactured electric vehicles.

However, the regulatory treatment of the Roshan Apni Car product communicated earlier to RDA participant banks will continue to remain effective.

These amendments in PRCF would be applicable, with immediate effect, on new financing facilities where the Banks/DFIs have not granted the approval yet. All other instructions on the subject shall, however, remain unchanged.

Head of Research, Pak Kuwait Investment Company, Samiullah Tariq anticipates 10pc drop in sales of cars after July because of high vehicles’ prices, rising interest rates and fresh measures to control auto financing by the SBP. He said industry sales had been flourishing because of a huge backlog of orders but “this momentum will no longer sustain.”

According to an analyst at KTrade Alert of KASB, the monthly lease payment may rise by up to 21-43pc with the reduction in tenures. He said Indus Motor Company (IMC) may remain shielded on account of its popularity in the rural areas where the bulk of vehicles are purchased in cash.

Vehicle sales may fall by 20-25pc in FY23 due to a sharp 30pc increase in automobile prices, to date. Auto prices are also under pressure due to depreciation of the rupee, elevated commodity prices and surging freight rates, he said.

A sharp increase in the interest rate and restrictions on auto financing would further enhance the cost of leasing cars, thus affecting potential demand in FY23.

A Toyota dealer said the company had already suspended fresh booking from May 18 due to an uncertain political and economic situation and the volatile exchange rate.

He said the delivery time of Toyota Yaris is two to three months, while it ranges from four to five months for other variants. “We had nothing on agenda on Tuesday to discuss with the sales team as buyers did not turn up for new booking after an increase in the interest rate and high car prices,” he added.

A Honda dealer said there was hardly any new booking of the vehicle on Tuesday after a massive rise in the interest rate and fear of further price hikes due to exchange rate parity. The delivery time of Honda City and BR-V models is two to three months while the buyers will get Honda Civic basic model delivery in August 2022. However, the loaded model of Honda Civic will be delivered by April 2023 on booking by a buyer today.

In September 2021, the SBP had cut the maximum tenure of auto financing from seven to five years to discourage demand for automobiles in view of the rising current account deficit triggered by surging imports. Besides, the interest rate also continued to go up.

However, rising interest rate and high prices and tightening of auto financing did not discourage buyers. As a result, total car sales soared by 51pc to 191,237 units in 10MFY22.

As per SBP data, auto financing at the end of April soared to Rs367 billion, showing a jump of 25pc year-on-year and 0.9pc month-on-month.