Rising policy rates could curb record auto loans

KARACHI: Auto loans hit an all-time high of 346 billion rupees in October 2021, up 44% from 240 billion rupees in the same month last year, data showed on Friday, but analysts fear that ‘A hawkish monetary stance is proving a hurdle in the road for auto financing growth.

Total car loans rose 2.2% from September of this year.

Umair Naseer, senior research analyst at Topline Securities, said the main reason for the strong demand for auto loans was the State Bank’s key rate at 7%.

“But it will now gradually decline with the rise in the policy rate, just like auto sales. On average, automakers sell 30-40% of their cars through auto finance,” Naseer said.

Total car loans have shown an upward trend since August 2020 – rising from Rs 211 billion in June 2020 to Rs 346 billion in October this year.

This coincides with a policy rate cut to 7% from June 2020 to September 2021 and the opening of the economy after the lockdown due to the pandemic.

On Friday, the State Bank of Pakistan raised its policy rate by another 1.5 percentage points.

The central bank also said it would hold its next two monetary policy meetings in quick succession in December and January and that the market expected another key rate hike.

Arsalan Hanif, research analyst at Arif Habib Limited, said auto finance remained at a certain level before the coronavirus pandemic.

“But after the lockdown was eased and the policy rate cut, auto finance showed strong growth,” Hanif said.

However, analysts agreed that auto finance growth would slow and could gradually fall from the current level over the next few months, with people expecting the central bank to raise the key rate further. A higher policy rate would make car financing more expensive and therefore less attractive to car buyers.

In addition to the higher interest rate, the State Bank also tightened car finance conditions in September in a bid to rein in car loans amid broader concerns about the growing current account deficit, which would also affect car financing.

“But the central bank restrictions will come into play in January and February. Many people have already reserved their car before the new central bank clauses, which will not affect them,” explained Arsalan Hanif.

The SBP increased the minimum down payment ceiling from 15% to 30%; reduction of the maximum repayment period for car loans from seven to five years; reduce the debt ratio from 50% to 40%; and it also limited the maximum car finance loan to Rs 3 million. These restrictions, however, do not apply to cars with an engine capacity of less than 1000cc.