LAHORE: The State Bank of Pakistan (SBP) has released its credit data for the month of August 2022. Net car loans declined by 2.2% month-on-month (MoM) from July for a contraction of 8 billion rupees.
This amounts to the largest contraction on record since the SBP began publishing its credit data in June 2006.
Outstanding car loans amounted to Rs 352.5 billion in August, against Rs 360.5 billion in July. This translates into net auto loans amounting to Rs 8 billion.
It is relevant to note that the negative value does not mean that the banks have made no loans. “If the number of auto loans maturing is greater than the number of cars financed, which is the case now, then the part of the gain will be much higher than the rebooking,” says Babbar Wajid, head of consumer banking. of the Habib Metropolitan Bank, when asked by Profit.
“Auto loans are a fairly large component of consumer lending in Pakistan, and a large part of it is repaid in repayment of principal. New loans are either not taken out or are taken out for very small amounts, that’s that’s why it looks like there’s been a very big drop,” Wajid continues. “We all know that auto loans have dried up because auto loans are very unlikely to return numbers at 20-21% after the financing, similar to those that existed when the cost of financing was 10-11%”.
Wajid’s explanation for the increased cost of finance is only compounded by the SBP’s amendments to prudential requirements on auto loans and the macro-economic situation potential buyers faced in 2022.
First, potential buyers are in a worse position to buy cars in 2022, especially this summer, than at any time in the past decade. Inflation has averaged over 20% throughout the summer. Automakers have added to the erosion of customer purchasing power by introducing at least three upward price revisions since the start of 2022.
In addition, SBP, through its increased administrative oversight of the import of Completely Knocked Down (CKD) kits, has created supply shortages that have led automakers to actively suspend the sale of their vehicles for various periods over the years. last months.
Second, in the event that customers persist in their buying decision, despite rising prices, the SBP has taken deliberate steps to make car financing unattractive and expensive for customers to stem currency outflows from the Pakistan.
Earlier this year, SBP has again changed the prudential requirements to reduce the terms from five to three years for cars over 1000 cc. It was above last years measures, which saw the SBP cap the term at five years, increase the down payment from 15% to 30%, cap the financing at Rs 3 million and ban the use of the financing for imported vehicles.
Beyond the reduction in new loans from banks, it is also possible that more customers are choosing to get rid of their delinquencies. This is likely due to the increased cost of living and/or possible increased reimbursement cost that customers are likely to incur due to the increased KIBOR. Profit calculated that customers who took out auto loans in 2021 alone on floating finance rates would see a 30-35% increase in their monthly payments going forward.
The cumulative decline in auto finance in 2022 is around Rs 15 billion. Going forward, these declines are likely to increase unless the SBP loosens its auto financing or the macroeconomic situation improves significantly.
“The average car loan has a lifespan of 48 months. This is an inverted curve, so principal repayments accelerate over time. The interest repayment is higher than the principal in the initial part of the loan, but as the loan goes on for 18 to 20 months, the principal part decreases very quickly,” Wajid said.
Using the 18-20 month calendar, current debt service, even if customers terminate their debts earlier, is at the earliest for loans originated in January and February 2021. If new loans do not increase, these declines are likely to increase as the principal car loans of Rs 97 billion start to be disbursed in the coming months.