Auto loans are slowly turning infectious—perhaps not becoming as deadly as during what is now known as the “covid-quarter” when the country was quite literally engulfed in a deadly virus—but climbing. In the last recorded quarter (i.e., Mar-23), NPLs for car loans climbed to 1.5 percent, up from 1.2 percent in June-22. But this is nothing in comparison to the consumer non-performing loan ratio of 4 percent though (that climbed up from 3.6% in Dec-22) and 7.8 percent infection ratio for all banking private sector loans. But net borrowing in car purchase has safely entered the red-zone—there are more loans paid off than those extended. And they in fact, began their backward trajectory as early as Jul-22.

Banks may be limiting their exposure (maybe forcefully?), but it seems that less and less consumers are seeking out automotive loans given the rapidly rising Kibor. At 22 percent, auto borrowing would be too expensive for consumers. In fact, there was an inflection point in Jul-22 when net borrowing decidedly turned negative where Kibor crossed 15 percent. It serves SBP that has been trying to curtail demand through other means (if borrowing is costly enough, buyers would back-off). Auto loans constitute between 40 percent and 60 percent of total auto sales. In Sep-21, and later on again in May-22, the SBP introduced amendments to the Prudential Regulations for consumer financing that would principally reduce auto financing by doubling the down-payment requirements (so consumers will need higher cash equity), and reducing the maximum tenure first for cars with engine displacement of 1000cc and below only and then extending it to all cars (so consumers will pay a higher monthly instalment), making auto financing that much more expensive. Consumers were also banned from attaining financing for imported vehicles.

This policy was a U-turn, in sharp contrast with the auto policy presented a year before which promised to do quite the opposite i.e., relax credit requirements. Even so, when the amendment was first introduced, car loans persisted—Kibor was still below 10 percent. But revised amendments in the summer of 2022 together with Kibor crossing 12 percent had the desired affected. Perhaps, that is when cars became truly out of reach for consumers and companies alike (though, credit to bank employees for cars is still net positive and has been throughout this time).

Consumers have been now staring at the face of substantially more expensive cars that they must buy on cash because borrowing is near undesirable with longer still delivery dates—the latter due to the prevailing import restrictions that have found auto assemblers in the kind of fix they are unable to find a way out of. They simply cannot assemble vehicles without procuring CKD kits from abroad amid the LC crisis. Automotive volumes in 11MFY23 have resultantly been slashed by half in this year (or shrunk 52%).