It has been over 2 years—25 months to be exact—since net bank loans for consumer vehicles turned crimson. This implies that existing loans are being paid back but fresh loans are not being doled out; certainly not as many as before. A better picture of the current credit situation should be gleaned from data that records a number of borrowers and/or average loan size but SBP does not publish such statistics for public consumption, and therefore one can only rely on borrowing trends. Nevertheless, alongside substantially subdued financing is the demand in the automobile market that continues to dwindle. Notwithstanding the lofty claims of the market that the industry will grow by 300K units every 5 years as the population expands and demands cars grow. Those growth expectations must be placed on a break as the economy trudges out of its rather prolonged slump cycle.
There is certainly a strong correlation between policy rates and automobile demand lower bank lending rates would reduce the monthly payments against leased cars and thereby allow a greater number of consumers to seek out auto financing. In Jun-24, the SBP for the first time in 12 months reduced the policy rate from 22 percent to 20.5 percent. During COVID, SBP reduced the policy rate to 7 percent (Jun-20). As a result, net borrowing shot up. In Sep-21, the rate was raised ever so slightly to 7.25 percent and there was a delayed impact on auto loans. But as the rates began to go up, fewer loans were being doled out evidenced by net borrowing turning negative. The first time net borrowing became profoundly negative was Jul-22 and it never stopped. It wasn’t just that borrowing was becoming expensive; it was also by the design of the regulator that tightened prudential regulations for car financing on Sep-21 and May 22 to discourage imports and save on foreign exchange expenses at a time of precarious balance of payment standing.
A lot has improved since, though one would argue that a lot has taken a turn toward the worse. The economic challenges Pakistan faces are chronic and deep-rooted and won’t suddenly be fixed by another injection of IMF funds. It will take substantially more, much more than just cuts in policy rates for demand in the automobile market to spur. On July 24, the SBP introduced another cut to the policy, and more cuts are cautiously expected. However, the government’s regulations for auto loans remain tight. Taxes have been raised. Prices for cars are prohibitively high, and disposable incomes for the population have shrunk as new taxes are introduced. Inflation led by higher consumption taxes, fuel prices, and international commodity prices will further reduce buying power. Though cuts in policy rates leading to reduced lending rates could potentially increase demand for fresh loans, these cuts will have to be substantial.
Even then, pressures on the current account in the coming may mar chances of growing financing if the SBP tightens government regulations more either by making loan terms stricter or by forcing banks to place harsher credit assessment requirements for loan seekers to adhere to. There are already significant barriers to formal financing for cars; banks often reject applications based on very minor issues or require a mountain of documentation when a few would do. This has the potential to keep the default rate low but also speaks to banks’ limited motivation to boost consumer loans and the existing infrastructure and technology they have available for credit assessment and risk management. Nevertheless, comparatively cheaper loan payments lured by lower policy rates will bring back some of the demand that has been absent in the automobile market, but to get back on the path that automobile assemblers set their expectations on will require herculean changes within the fabric of the economy.
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