In a notable downturn, car loans in Pakistan plummeted to Rs251 billion in December 2023, marking a substantial 25.6% decrease compared to the same period in the previous year, as revealed by data from the State Bank of Pakistan (SBP).
This decline follows a 2.3% drop from November when the total loans amounted to Rs257 billion.
Analysts are cautiously optimistic about a potential reversal in this downward trend over the coming months. They anticipate that demand for car loans may pick up in response to potential interest rate cuts and a easing of inflation pressures, factors that could reignite interest in auto financing.
The sharp decline in car loans began after reaching a pinnacle of Rs368 billion in June 2022, witnessing a significant decrease of Rs117 billion since then. Several factors contribute to this trend, including low consumer spending power amid escalating inflation, expensive auto financing, and rising car prices. The SBP, in an attempt to combat surging inflation, has maintained its benchmark interest rate at a record 22% as of last month, reflecting a cumulative increase of 15 percentage points since September 2021.
Macroprudential regulations implemented by the SBP have also played a role in restricting auto finance. Adjustments to prudential rules for consumer finance in September 2021 and May 2022, such as reducing the maximum credit period and increasing the required down payment, have curtailed auto loans. Moreover, banks were mandated to obtain SBP approval in advance for letters of credit pertaining to 25 high-value capital goods, including Completely Knocked Down (CKD) vehicles. The depreciation of the rupee has further escalated production costs for automakers, contributing to a decrease in automobile demand and subsequent price increases.
Contrary to the decline in car loans, the latest data reveals a surge in car sales, with 10,500 units sold in January, marking an impressive 81% increase from the previous month. Analysts attribute this surge to the combined impact of new-year buying enthusiasm, relaxed import restrictions, and increased affordability stemming from falling automobile costs.
With expectations of interest rates dropping in March, thereby improving auto financing conditions, analysts foresee a sustained rebound in sales. However, it is noteworthy that car sales experienced a sharp decline of 48%, amounting to 49,990 units, during the first seven months (July-January) of the current fiscal year.
SBP data for December indicates that loans to the private sector reached Rs8.5 trillion, reflecting a 4.3% increase from the previous month but a 1.4% decrease compared to the same period in the previous year. Consumer financing in December stood at Rs818 billion, marking a 9.1% year-on-year decline, highlighting the broader challenges faced by the lending sector in the country.
