Auto loans hit a record high in December, defying consensus calls

KARACHI: Despite tighter interest rates and regulatory restrictions, auto loans hit a new high in December 2021, defying expectations of a tumble, as buyers rush to secure deliveries ahead of approval mini-budget so they have to pay less tax.

Auto loans rose 1.3% to Rs 353.64 billion in the last month of the past year from November 2021, while jumping 38% from December 2020, according to data from the State Bank of Pakistan (SBP).

Arsalan Hanif, research analyst at Arif Habib Ltd, said auto finance is expected to decline due to rising interest rates and restrictions imposed by the State Bank.

“However, unexpected [rise in] demand in December also increased auto financing,” Hanif added.

According to figures shared by the Pakistan Automotive Manufacturers Association (PAMA), car sales rose 96 percent to 27,300 units in December compared to the same month last year.

The SBP raised the policy rate to 9.75%. He also introduced restrictions on car financing in September last year to contain growing demand in a bid to reduce the soaring current account deficit.

This is because the local auto industry uses a high level of imported parts, while locally manufactured auto parts also rely heavily on imported raw materials.

The central bank has increased the minimum down payment ceiling to 30% from 15%; reduced the maximum car loan repayment term from seven years to five years, reduced the debt ratio from 50% to 40% and also limited the maximum car loan to Rs 3 million. These restrictions, however, do not apply to cars with an engine capacity of less than 1000cc.

According to industry officials, the number of cars purchased through auto finance represents between 30 and 40 percent of the total cars sold in the country.

“December sales increased due to uncertainty over car taxation due to the mini budget. People didn’t want to pay more taxes if the mini budget passed. So they flocked to dealerships automobiles to demand on-time delivery of their cars in December,” Hanif added.

“Banks pay a significant portion of the auto finance payment on behalf of their customers to automakers when the cars are delivered,” Hanif said, adding that high sales in December were also reflected in auto finance.

Analysts at Arif Habib Ltd expect the trend of increased auto financing to continue in January as the mini budget has yet to be approved and people demand the delivery of cars on time so not to pay more taxes.

“There’s also the New Year’s euphoria as people normally try to get their cars delivered in January to drive the newest model possible,” Hanif said.

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