Car financing in Pakistan experienced a modest increase of Rs245 million, or 0.1 percent, in September, marking the end of a 27-month decline. This shift can be attributed to a decrease in interest rates. As of September 2024, car loans climbed to Rs227.541 billion, up from Rs227.296 billion in August, according to the latest data released by the State Bank of Pakistan (SBP) on Friday. Despite this monthly rise, auto financing remains down 16.4 percent year-on-year in September.
The peak for auto financing was recorded at Rs368 billion in June 2022. Analysts had anticipated a rebound in demand for car loans as banks began to offer reduced markup rates to meet this year’s ambitious 50 percent advances-to-deposit ratio (ADR) target. Compared to fixed rates ranging from 20 to 24 percent a year ago, many banks are now offering rates between 14 and 15 percent, encouraging more consumers to consider financing options for vehicle purchases.
The demand for car loans had been previously subdued due to elevated interest rates, rampant inflation, and macroprudential measures in response to an economic downturn. However, recent improvements in economic indicators, including declining interest rates, suggest a potential upswing in auto financing in the forthcoming months.
The consumer price index (CPI) inflation eased to 6.9 percent in September, down from 9.6 percent the previous month. Analysts expect inflation to remain within single digits in the upcoming months, bolstering the case for further interest rate reductions by the SBP. Projections indicate that inflation for October may register between 6.5 and 7 percent, according to a recent report by Topline Securities.
The SBP’s monetary policy meeting is slated for November 4, 2024, where analysts predict a fourth consecutive interest rate cut of 200 basis points (bps), reducing the current rate of 17.5 percent and totaling a cumulative reduction of 650 bps over the past four to five months.
The Pakistan Automotive Manufacturers Association (PAMA) has reported a notable increase in car sales, with a 24 percent rise to 10,297 units in September. Month-on-month, this represents an 18 percent increase. In the first quarter of the fiscal year, car sales surged to 27,585 units, reflecting a remarkable 31 percent growth compared to the same period last year.
As the economic landscape shifts, the revival in car financing and sales points to a potential recovery in the automotive sector, driven by favorable financing conditions and consumer confidence.