KARACHI: State Bank of Pakistan increase in discount rate to 12 percent from 10.5 percent will directly impact consumer financing.
Discount rate being the rate at which central bank lends to other banks would lead to across the board hike in interest rates on all lending products.
The consumer financing might slowdown due to increased interest rate. The most affected product will be auto finance, analysts said.
Sohail Akram Head of Car Ijarah, Bank Al-Falah said market is already down and increase in interest rate will further reduce auto financing.
He said 1.5 per cent rise would add up with the banks’ margins, which will further increase the rates.
If banks were offering auto financing at 18 percent this would be available at more than 20 percent and this increase is out of the reach of majority of customers.
He said Islamic Car Ijarah rate would not be revised new customers will get this product at higher rates. This will automatically discourage the customers to go for auto financing.
The rate hike by central bank would also cause the periodical payments of all banking products to rise thus increasing the default rate, Sohail said.
Bilal Hameed analyst at JS Global Capital said that rising NPLs and default rates have already forced the banks to reduce or abandon car-financing portfolios, which has been one of the major factors in declining auto sales.
He said that discount rate hike would lead to an increase in interest rates and eventually an increase in the periodical payments of the customers. Increase in the periodical payments will boost the default rates, he warned.
Despite cut in the conventional auto financing portfolios banks are still offering Islamic auto finance.
Apart from interest rate hike industry experts say that continuous rise in the prices of cars has also caused a dent in auto financing.
Soaring food and fuel inflation has reduced purchasing power of the people and affected their ability to make periodical payments.
Pakistan Automotive Manufacturing Association (PAMA) statistics for April sales show that auto sales (Cars + LCVs) for the first 10-months (Jul-Apr) of FY08 stood at 153,846 units, down five per cent compared to 162,462 units sold in the same period of FY07.
The 13 percent month-on-month improvement in car sales in March over February was not sustained in April as the industry saw a decline of two percent in auto sales in April.
April sales dropped due to increase in car prices by almost all local auto assemblers. The prices have been revised upward to pass on the impact of rising costs to the end consumers along with slow auto finance by banks.