Automobile sector has grown exponentially in last few years especially after arrival of more brand as per the Auto Policy of 2016-21. Auto sales has been all time high and thanks to lucrative interest rates for car finance and additionally in most cases banks offering loans without checking borrowers financial situation for repaying the loan. As per an estimate 50% of car sales in Pakistan rely on car financing.
Car Finance and Impact on Imports
Although last year in 2020 COVID-19 outbreak caused significant dent in auto sales, situation is completely opposite this year. The interest rate of 7% in March 2021 instead of 13.5% in March 2020, created a ripple effect in the market and created a huge demand for the car financing.
According to the data released by the State Bank of Pakistan, car finance in Pakistan has reached an all-time high of Rs. 285 billion in March 2021, compared to March 2020, which is a year-on-year (YoY) increase of 30% or Rs. 66 billion. Auto finance in Pakistan has recorded the highest figures with a month-on-month (MoM) growth of 4.5% or Rs. 12 billion as reported earlier this year.
Such a high demand in auto sector automatically increased import of Knock Down Kits/ CKD for local assembly. Keep in mind that all new automobile entrants as per Auto Policy also getting a huge tax breaks on imports. Beside CKD , used vehicles as well as new Completely Built units (CBU) of vehicles also saw a huge surge at port. Obviously with increase number of automobile sales , import of crude oil and other petroleum products also saw a massive increase approximately 103% despite increased prices in the international market.
Trade Imbalance & Inflation
Although there are many other items on list of imports, import of kits for local assembly as well as parts and completely built units of vehicles contributed to major degree in the current account deficit because of outflow. In simple words , Pakistan made higher foreign expenditures compared to income. In first two months of July & August of the current fiscal year , over 9200 vehicles were imported and out of which 3000 were brand new imports. Although increase in import of CBU and CKD might suggest an increase in local economic activity and growth , it automatically created a trade imbalance because of lower value of exports in the equation, and additionally causing the devaluation of Pakistani currency and rising inflation.
For last several weeks, Finance Ministry was working on means to control the import of non essential goods and increasing duties on the imports was on the table. Although automobiles are high in demand in Pakistan but seems like Government view it as a non essential item especially the CBU vehicles. In a recent TV interview, the Finance Minister also hinted about taking measures to control unnecessary imports.
New Regulations by SBP on Car Finance
Now on September 23,2021 , a circular was issued to all banks and other financial institution from State Bank, which outlined some new regulations of consumer financing and especially auto financing. The revised Prudential Regulations for Consumer Financing (PRCF) are as follows.
- The total monthly amortization payments of consumer financing facilities, as prescribed in paragraph 1 of the regulation, should not exceed 40% of the net disposal income of the prospective borrower. Similarly, in paragraph 3 of the regulation Debt Burden Ratio for Consumer Financing may be read as 40 % instead of 50 %.
- The maximum tenure of the auto finance facility is reduced from 7 years to 5 years.
- The minimum down payment is increased from 15%to 30 % of the value of vehicle.
- Overall auto loans/financing limits availed by one person from all banks/DFIs, in aggregate, shall not exceed Rs3,000,000/-, at any point in time. However, the financing limit of borrowers whose approved limit already exceeds Rs3,000,000/- may be amortized as per existing terms and the same shall not be further increased.
- New as well as used imported vehicles shall not be eligible for auto financing from banks/DFIs
The State Bank of Pakistan SBP further stated and clarified that these new amendments will not apply on the following conditions;
- Financing for locally assembled/manufactured vehicles of up-to 1000cc engine capacity.
- Roshan Apni Car product of banks .
- Locally assembled/manufactured Electric Vehicles. Accordingly, these financings will continue to be governed by PRCF existing prior to these amendments. Besides, the regulatory treatment of Roshan Apni Car product already communicated to RDA participant banks will continue to remain effective.
- As per State Bank of Pakistan, the above amendments in PRCF shall be applicable with immediate effect, on new financing facilities. All other instructions on the subject shall, however, remain unchanged.
Government’s Goal Behind New Regulations
It seems government don’t want to impose new taxes on imported goods as far as automobile industry as it will cause increase in pricing [ government recently reduced taxes to bring the pricing down ] but indirectly trying to control the outflow via import by cutting the local demand of vehicles.
In other words by imposing new finance regulations, it might make it little harder for consumer by reduce his/her buying power. Reducing the finance term from 7 to 5 years ensures a higher minimum installment possible. Naturally fewer people are able to afford the higher (30%) down payment. Both these steps combined will make auto financing less appealing and thus squeeze the new car demand.
State Bank also impose a maximum limit of loan an individual can have, 3 Million PKR to be precise [auto + any other personal financing in total at a given time]. This means a buyer need to make a higher upfront payment on certain expensive vehicles. As approx. 50% of new vehicles are financed through banks , the new ruling might filter out potential buyers and eventually might cool off the demand and ease pressure on imports. It automatically may result in reduced petroleum products import bill, however, it might take little time to reflect any results as intended.
Limitations for Banks Over Car Finance
To control the import of CBU vehicles including Electric Vehicles regardless of battery capacity either new or used, banks now will not be able to finance these vehicles. This is also a good news for the fact that there are certain new auto companies who already got a Green Field status as per Auto Policy but extensively importing completely built units instead.
This new rule will also force them to speed up their work towards local assembly. Keep in mind that CKD will still be imported but it cost much less in comparison to the CBU. These new rules can also force local car companies to invest towards localization so, import burden is reduced. I hope government also mandate the minimum localization percentage.
Benefit for Middle Class
To help the middle class and low incomes families who are in the market for a small entry level vehicle [ 1000cc & lower ] as well as government’s pursuit towards the greener Pakistan and EVs [ local assembled ONLY] , all these new regulations will not be applicable.
I think , these measures might be harsh to many at this point and a double edge sword but our economy do need actions to float it in right direction. Our trade deficit is increasing at an alarming rate and as a nation , we need to work together toward improvements and start from some where and take all necessary measures. It is also very important for government to help consumers , enforce car companies for timely delivery of vehicles and do more to control premiums.
So, Do you think all these new adjustments will make any impact and will Government succeed in their mission ? Share your thoughts in comments.