Pakistan central bank expected to double auto financing limits

Pakistan's central bank might double auto financing limits to PKR 6 million to help boost sales of vehicles following its previous decisions to reduce the benchmark interest rates significantly.

The banking sector has been rife with news of the purported development that after the significant cut in interest rates — down by 700 basis points since June — the State Bank of Pakistan (SBP) might consider raising the limit.

The previous limit of PKR 3 million was imposed in September 2022 with another condition that the borrower has to pay 30% of the car value upfront. However, prior to that, there was no bar on auto financing and individuals could apply for car loans, paying only 10% as down payment.

However, the September 2022 directive also included several other conditions, such as that individuals could opt for car financing for a maximum of three years for 1000 cc and five years for less than 1000 cc. Moreover, no imported vehicle could be financed.

Since the last cut in November, the banking sector has received signals that the limit would likely be doubled to PKR 6 million to boost auto financing and car sales. Moreover, increase in car sales would help reduce banks' advance-to-deposit ratio (ADR), which still has been under 50%, hinting the majority of banks might avoid heavy additional taxation of 16% that would be applicable if their ADRs have been below threshold of 40%.

The banks have to face additional taxes of up to 16% if the ADRs are below the 50% limit prescribed by the State Bank of Pakistan till Dec 31.

The regime of higher interest rates had led to a decline in auto financing, which reached a peak level of PKR 367.8 billion in June 2022, after which it started to recede. The declining trend in auto financing continued for 26 months till August this year.

The trend started to reverse following the trickle-down impact of lowering of the interest rates which have been slashed by 700bps to 15%, almost 28-months-low mark. The last time the benchmark interest rate was 15% was in July 2022.

Auto financing in August this year reached PKR 227.3 billion — the lowest in last 26 months. However, it started to rise slowly in line with the reduction in rates and, in October, the SBP revealed that the borrowing reached PKR 235.9 billion.

According to a report of brokerage firm Arif Habib Ltd., in October, auto sales in Pakistan amounted to 13,100 units, reflecting a 27% growth on month-to-month basis and nearly 112% rise over the same month last year.

In four months of the current fiscal year, auto sales reached 40,700 units, representing a 50% growth compared to the same period of preceding year, according to Pakistan Automotive Manufacturers Association.

The increase in auto sales is largely due to the recent decline in interest rates which has made auto financing more accessible. Additionally, the availability of low-markup easy monthly instalment loans from various auto assemblers has further fueled demand.