The State Bank of Pakistan (SBP) has recently released its credit data for June 2023, marking the end of a challenging fiscal year for automotive lending.
Outstanding credit has reached a low of Rs 2.94 kharab, the lowest since April 2021, and FY 2023 witnessed twelve consecutive months of credit contractions, the longest since the 2007/8 financial crisis. The net automotive credit contracted significantly by Rs 74.117 arab.
According to Yousuf Farooq, Director of Research at Chase Securities, the auto industry faces a slow path to recovery, with a potential rebound in auto sales and credit taking several years. He suggests that interest rates might gradually decrease from 3QFY24, depending on the external account situation, and the SBP may relax administrative controls adopted in recent years.
The collapse in automotive lending can be attributed to a combination of factors. Iftikhar ul Haq, Group Head of Consumer Finance at Meezan Bank, points out that the crisis is more severe than the 2007/8 one due to various factors.
Tightening consumer finance regulations, high KIBOR levels, a surge in car prices caused by Rupee depreciation, disruptions in the car manufacturing supply chain due to import restrictions, inflationary pressures, and overall political and economic instability have all contributed to the current situation.
The SBP’s actions, including capping auto finance exposure and imposing stricter financing tenure and debt burden ratio requirements, were driven by the external account situation to reduce car sales and financing and alleviate import pressures. However, some experts argue that administrative measures may not be the most effective solution.
Interestingly, the contractions in automotive lending are not solely due to a lack of new loans but also premature loan terminations.
The hike in KIBOR and the variable rate nature of auto loans have increased repayment amounts significantly, leading to an increase in early loan repayments. On the other hand, demand for new vehicle financing has plummeted due to the aforementioned factors.