Analysis: The future of unaffordable auto finance

A prominent local businessman, Mr. Qamar Khan, is one of many people who have tried to move from the Suzuki Swift to the Kia Sportage through a bank financing facility since February.

After prices rose to 5.4 million rupees from 4,756 million rupees for the Kia Sportage in the past few months, followed by an interest rate increase, he has finally decided to put his plans on hold.

“I can’t buy at this exorbitant price. The rest of the damage was caused by a 1.5 percent rate hike to 13.75 percent recently, followed by a five- to three-year financing term reduction on cars over 1,000 cc, making monthly payments untenable. manageable.”

Khan said reducing the term to three years from five means the buyer has to manage an extra monthly amount amid looming uncertainty about more interest rate increases, price hikes and more curbs on auto financing to control the current account deficit.

Banker says consumer car financing shrank to 20 per cent after SBP reviews

Ahmed Shamim, Regional Director – South in Consumer Car Finance at Dubai Islamic Bank Pakistan Limited says consumer car finance has shrunk to 20 per cent after the revised prudential regulations of the state bank. Less than 1,000 cc of vehicles (locally assembled) can be financed with a minimum of 30% equity instead of 15%, and the term has been revised to five years from seven years.

He claims that the maximum debt burden ratio of 40 per cent and minimum down payment of 30 per cent makes it impossible for a person of average income earning 100,000 rupees per month to obtain car financing.

Cars over 1,000 cc can be financed with a roof, but the term will be three years instead of five. Shamim said changes in tenure and the maximum overall debt burden ratio affect the business directly, which is actually a problem for a middle-class person who wants to have a car to finance.

He added that Kibor’s impact will certainly be reviewed after six months or 12 months, whichever comes first, but capping the debt burden, overall exposure limits and maximum down payment with minimum tenure, directly impact the auto finance business.

He said there was a need to revise the financing ceiling from Rs 3 crore to Rs 7 crore for all vehicles and the debt burden ratio to 50% from 40% to facilitate auto finance consumers.

Shamim said that for a middle-class man who bears all other household expenses, it is now very difficult for an individual to bear the burden of monthly expenses due to strict precautionary regulations, which he cannot take advantage of even from a small car through auto financing.

“It seems unlikely that we will meet our target in June after a fresh increase in interest rates and lower premiums in months,” said a private banker who deals in auto finance.

Demanding anonymity, he said the assemblers are a bit comfortable now with the backlog of pre-bookings on their hands whose delivery time ranges from two to nine months. There is no doubt that the impact of higher interest rates and shorter periods from one month to another will be felt in the coming months.

He said that with the food price inflation already high and the likely rise in the prices of basic staples after the massive increase in oil prices, this will make it more difficult to manage the household budget for consumers. This will make them more reluctant to finance cars, he added.

Annoyed consumers

Mr. Saqib Waseem said: “I canceled the plan to purchase a new double cabin Suzuki Raffy and Toyota for my ‘rental company’ shortly after the interest rate increase and the increase in the monthly installment after the reduction of the monthly installment period.”

Another private banker dealing in auto finance said that consumers’ uptake of the bank to finance cars has dropped significantly after the recent hike in the policy rate. Besides, the ban on imports of used cars has also brought about another impact in auto finance.

“The bank charges an interest rate of 18 percent compared to 14 percent, which will be difficult for many consumers to bear,” he added.

“The trend has reversed. We are looking at buyers while last year buyers used to come in droves to finance cars.

The founder and CEO of Carfirst, Raja Murad Khan, said that with the prices of new, locally assembled cars rising several times a year, the used car market will continue to bear the brunt. Used cars also tend to get more expensive.

A three year old Honda Civic assembled locally is now selling for 4 million rupees, but the new car now costs more than 6 million rupees.

The average price of a used car is at least 1.9 million rupees which was 1.1 million rupees three years ago.

The demand for used cars has skyrocketed as a number of people are no longer able to purchase expensive locally assembled cars. He pointed to the rise in the prices of used cars, as a result of the high demand, to the level of locally assembled cars.

“Demand for used cars and up to 660cc-1000cc is likely to increase after petrol prices rose by Rs 30 per liter, while more price shocks are on the cards,” Raja said, anticipating another jump in used car prices.

Many people, while failing to buy locally assembled new cars, quickly switch to used cars, especially in the 660cc-1,000cc class.

He claimed that his company receives purchase inquiries from buyers in the price range of 1.5 million rupees for small cars to 3.5 million rupees for high-powered used cars from 2014 to 2017. Three years ago, this price was between 1 million and 2.5 million rupees.

Asked about the impact of higher interest rates on the sale of new cars, he said: “I am sure that the impact of higher interest rates on car sales through bank financing will not be severe as long as the old tradition of high demand and reduced supply from collectors continues into the future as well. .

Indus Motor Company (IMC) analysts at a corporate briefing a few days ago reported an expected 25-30 percent drop in volume sales in fiscal year 23 due to higher auto prices, higher interest rates, and lower consumer finance holdings. Auto Finance holds a 26% share of IMC’s total sales.

Pak Suzuki Motor Company (PSMC), in a company briefing, forecast a 5-10% decline in sales in fiscal year 23. 35% of total PSMC sales come from consumer financing.

Posted in Dawn, May 29, 2022

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