Pakistan’s auto loan sector shrinks for 18 months in a row

The State Bank of Pakistan (SBP) has released data showing a continuous decline in the amount of outstanding auto loans for the 18th consecutive month.

As of December 2023, the outstanding auto loans stood at Rs251 billion, down from Rs257 billion at the end of November and significantly lower than the Rs337 billion recorded in December 2022.

This represents a month-on-month decrease of 2.3 percent and a 25.5 percent drop year-on-year.

Since June 2022, the total reduction in auto loans has been Rs117 billion, marking a sharp decline from Rs368 billion 18 months ago.

Experts attribute this downturn to several factors, including the high cost of vehicles, increased markup rates, and changes in the State Bank’s regulations. However, there is optimism that auto financing will begin to improve in the next three months.

Mohammed Sohail, CEO of Topline Securities is of the view that a reduction in interest rates might lead to a revival in sales. He highlighted that the current slump in sales is due to the high prices of vehicles and leasing rates.

The Pakistan Automotive Manufacturers Association (PAMA) data indicates a sharp contraction in vehicle sales.

In the first half of FY24, car sales plummeted to 30,662 units from 68,912 units in the same period of FY23. Similarly, sales of light commercial vehicles (LCVs), vans, and pickups nearly halved to 8,442 units from 15,204.

Several factors have contributed to the dampened demand for automobiles. These include a 22 percent interest rate, a significant increase in vehicle prices, restrictions on auto loans exceeding Rs3 million, and a reduction in the payment duration.

Additionally, restrictions on opening letters of credit (LCs) due to the foreign exchange crisis have disrupted production, leading to frequent plant shutdowns by auto assemblers due to shortages of imported parts and accessories.

However, there are signs of improvement as the SBP’s has relaxed import restrictions on auto parts which has led to an increase in the imports of completely knocked down (CKD) kits, to reach $72 million in November 2023 and $104 million in December 2023, up from just $23 million in October 2023. This uptick signals some recovery in local vehicle assembly in the current month.

Indus Motor Company (IMC) resumed production activities after a shutdown due to parts shortage. Similarly, Pak Suzuki Motor Company Ltd (PSMCL) and Honda Atlas Cars Ltd (HACL) have also resumed operations after temporary suspensions.