ANALYSIS: The not-so-affordable future of auto finance – Newspaper
A senior local entrepreneur, Mr Qamar Khan, is one of the many people who have been trying to move from a Suzuki Swift to a Kia Sportage through a bank financing facility since February.
After a meteoric price hike to Rs5.4 million from Rs4.756m in the Kia Sportage in the last few months, followed by an increase in the interest rate, he finally decided to shelve his plans.
“I cannot buy at this huge price. The rest of the damage was done by a 1.5 per cent rise in interest rate to 13.75pc recently, followed by a reduction in tenure of financing from five to three years on above 1,000cc vehicles, making monthly installments unmanageable,” he said angrily.
Cutting the tenure to three years from five means a buyer has to manage an extra monthly amount amid the looming uncertainty of further hikes in interest rates, rising prices, and more curbs on auto
financing to control the current account deficit, Mr Khan said.
Banker says consumer auto financing shrunk to 20pc after SBP revisions
Ahmed Shamim, who is Regional Manager-South in the Consumer Auto Finance department of Dubai Islamic Bank Pakistan Limited, says consumer auto financing has shrunk to 20pc after the State Bank’s revised prudential regulations. Less than 1,000cc vehicles (locally-assembled) could be financed with minimum 30pc equity instead of 15pc and tenure also revised to five years from seven-years.
He claims that the debt burden ratio cap of 40pc and a minimum down payment of 30pc make it impossible for an average middle-class person earning Rs100,000 per month to obtain car financing.
Above 1,000cc vehicles can be financed with a cap, but the tenure will be three years rather than five. Changes in tenure and the cap on aggregate debt burden ratio are impacting businesses directly, which is actually problematic for the middle class person who wants to get a car on financing, Mr Shamim said.
He added that the impact of Kibor would be definitely revised after six months or 12 months, whichever comes first, but the capping of debt burden, limitations of aggregate exposure, and maximum down payment with minimum tenure are directly affecting auto finance businesses.
He said there is a need to revise the financing cap from Rs3m to Rs7m tenor for all vehicles and debt burden ratio to 50pc from 40pc to facilitate auto finance consumers.
Mr Shamim said that for a middle-class man with all the other household expenses, it is now very difficult for an individual to bear the monthly expense load due to strict prudential regulations, which he cannot avail even of a mini car through auto financing.
A private banker dealing in auto financing, said, “It seems that we are unlikely to achieve our target in June after a fresh hike in interest rates and a cut in months for installments.”
Seeking anonymity, he said the assemblers are a bit relaxed now due to the pile up of advance bookings in their hands whose delivery time ranges between two to nine months. The impact of high interest rates and shorter month-to-month durations will undoubtedly be felt in the coming months.
He said that with already high food inflation and a further possible price hike in essential items after a massive increase in petroleum prices, it would further make the household budget of consumers more difficult to manage. This would make them more reluctant to take car financing, he added.
Mr Saqib Wasim said, “I have cancelled the plan to purchase a new Suzuki Ravi and Toyota double cabin for my “rental business” soon after a new hike in interest rate and rising monthly instalment after a cut in the tenure of paying monthly installment.”
Another private banker dealing in auto financing said the footfall of consumers to the bank for auto financing has drastically plunged after a recent hike in the policy rate. Besides, the ban on used car imports has put another dent in auto financing.
“The bank is charging 18pc interest rate as compared to 14pc which will be difficult for many consumers to afford,” he added.
“The trend has reversed. We are looking towards buyers while last year, buyers used to come in large numbers for the auto financing,” he said.
Founder and CEO Carfirst, Raja Murad Khan said as the new locally-assembled cars are getting pricier multiple times in a year, the second hand vehicles’ market will continue to bear the brunt. Used cars also tend to get more and more expensive.
A three-year-old locally-assembled Honda Civic is now selling for Rs4m but a new one now costs over Rs6m.
The average price of a used vehicle is not less than Rs1.9m which used to be Rs1.1m three years back.
The demand for used vehicles has soared substantially as a number of people are unable to afford to buy costly locally-assembled cars. As a result of high demand, the prices of used cars have also risen to a level with locally-assembled cars, he said.
“Demand for used and even 660cc-1,000cc cars is likely to further escalate after Rs30 per litre jump in petrol prices, while more price shocks are on the cards,” Mr Raja said, anticipating a further price jump in used cars.
Many people, while failing to afford new locally-assembled cars, are rapidly switching over to used cars, especially in the 660cc-1,000cc category.
He claimed that his company receives purchase enquiries from buyers in the price range of Rs1.5m for small cars to Rs3.5m for high-engine power used vehicles of 2014 to 2017 models. Three years back, this price tag was hovering at Rs1m to Rs2.5m.
When asked about the impact of high interest rates on the sale of new cars, he said, “I am sure that the impact of rising interest rates on car sales through bank financing will not be so intense as long as the old tradition of high demand and low supply from the assemblers continues to persist in the future also,” he said.
Indus Motor Company (IMC) informed the analysts in a corporate briefing a few days back about an expected decline of 25-30pc in volumetric sales in FY23 due to higher car prices, an increase in interest rates and a reduction in consumer finance tenure. Auto financing holds 26pc share in IMC’s total sales.
Pak Suzuki Motor Company (PSMC), in a corporate briefing, anticipated a five to 10pc drop in sales in FY23. PSMC’s 35pc of total sales are from consumer financing.
Published in Dawn, May 29th, 2022