Are bank lending rates finally too prohibitive for car buyers to seek out new auto loans? With 6M-kibor close to 22 percent, net borrowing in auto financing to consumers has turned crimson. In fact, it has been red since Jun-22 when the Central Bank came up with further tightening in its prudential regulations in order to thaw new demand for car financing down and in turn, reduce imports. The SBP raised equity requirements and reduced loan tenors across different engine displacements, tougher restrictions for bigger engines. But is it really demand that has brought automotive volumes down by 51 percent (compared to last year) given that assemblers have been facing continual supply restrictions to precious imported CKD kits and parts forcing them to close down operations or reduce production for weeks at end?
Timely deliveries when inventories are not replenished on time are out of question. But given that between 40-60 percent of vehicles are financed through formal financing institutions, and net borrowing has already turned negative, the volumetric decline of 51 percent could almost entirely be led by the combination of higher borrowing cost and government restrictions. That also means, despite limited stock in the market, companies producing under capacity and taking limited orders all the while making each model substantially more expensive, car buyers are still buying—on cash—whatever is being sold. Fascinating! At the very least, net borrowing in automotives perfectly mirrors the shrinking auto market.
Equally fascinating is the sales for SUVs that have persevered and grown against harsh odds. In 11MFY23, SUV sales (including Toyota’s Hilux) grew 29 percent year on year with new notably non-Japanese model entrants such as Sazgar’s Haval, Hyundai Tucson, Chery Tigo and even the monstrous BAIC BJ40 performing fairly well given their rookie status in the market. The SUV pie has grown—its share rising to 18 percent of total vehicles up from 7 percent last year (though Toyota has been publishing cumulative numbers for Fortuner and Hilux which adds a big chunk to the SUV category given Hilux’s higher share). There are other successful players like Kia with many offerings as well as Masters Motors that has a rather popular MPV in its fleet called Karvaan. Bigger it seems is better in a tanking economy. Nevertheless, nearly all assemblers are struggling to keep heads above muddied waters having large capacities laying idle.
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