August sees the biggest contraction in car financing

August sees the biggest contraction in car financing

LAHORE: The State Bank of Pakistan (SBP) has released its credit data for the month of August 2022. Net car loans have been reduced by 2.2 percent month-on-month (MoM) from July for a contraction of Rs8 billion.

This represents the largest contraction ever recorded since the SBP began publishing credit data in June 2006.

Outstanding car loan amounted to Rs 352.5 billion in August, compared to Rs 360.5 billion in July. This results in net car loans of Rs8 billion.

It is pertinent to note that the negative value does not mean that the banks have not provided loans. “If the number of car loans maturing exceeds the number of cars being financed, which is currently the case, then the disbursement portion will be much higher than the new booking,” explains Babbar Wajid, Habib Metropolitan Bank’s head of consumer banking. by means of Gain.

“Car loans are quite a large part of consumer loans in Pakistan, and a large part of it is paid off in the principal repayment. New loans are either not taken out or are drawn in very low amounts and therefore it appears that there has been a very large decline,” continues Wajid. “We all know that auto loans have dried up because it is highly unlikely that auto loans will yield 20-21 percent post-finance, similar to those that existed when borrowing costs were 10-11 percent.”

Wajid’s explanation for the increase in borrowing costs is only exacerbated by the SBP’s changes to car loan prudential requirements and the macroeconomic situation potential buyers have faced in 2022.

First, potential buyers are in a worse position to buy cars in 2022, particularly this summer, than they may be at any time in the past decade. Inflation averaged more than 20 percent throughout the summer. Automotive companies have increased customer purchasing power by making at least three upward price revisions since early 2022.

In addition, SBP’s increased administrative oversight of the import of completely broken kits (CKD) has created supply shortages that have led car companies to actively halt sales of their vehicles for several periods in recent months.

Second, in the event that customers persist in their purchase decision despite rising prices, the SBP has taken deliberate steps to make auto financing unattractive and costly for customers to stop the outflow of forex in Pakistan.

Earlier this year, SBP has again amended prudential requirements to reduce maturities from five to three years for cars over 1000cc. This was on top In recent years measures, maximizing SBP terms to five years, increasing the down payment from 15 percent to 30 percent, limiting financing to Rs 3 million, and not allowing financing for imported vehicles.

In addition to the reduction in new loans disbursed by banks, there is also the possibility that more customers will choose to get rid of their outstanding payments. This is likely due to the increase in the cost of living and/or the potential increase in reimbursement costs that customers are likely to experience as a result of the increase in KIBOR. Profit calculated that customers who only took out car loans at variable financing rates in 2021 would see their monthly payments increase by 30 to 35 percent in the future.

The cumulative decline in auto financing in 2022 is about Rs15 billion. Going forward, these declines are likely to intensify unless the SBP loosens its noose in auto financing or the macroeconomic situation improves dramatically.

“The average car loan has a term of 48 months. It’s an inverted curve, so principal repayments accelerate over time. The interest repayment is greater than the principal in the first part of the loan, but if the loan exceeds 18-20 months, the principal part decreases very quickly,” said Wajid.

Using the 18-20 month timeline, despite customers ending their debt obligations earlier, current debt service is at the earliest for loans closed in January and February 2021. If new loans do not increase, these declines are likely to increase as the principal for the Rs97 billion car loans is due to be repaid in the coming months.

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