High interest rate drives demand for used cars
KARACHI: Amid unprecedented 22 per cent interest rate and restrictions imposed by the State Bank of Pakistan (SBP) to curb vehicle demand, consumers have increasingly been seeking used vehicles for auto financing over the past two to three years.
A number of banks have ventured into the leasing and financing of used vehicles, including models up to nine years old. However, high monthly instalments continue to deter many consumers due to affordability issues.
Dealers and banking sources have noted that the availability of used vehicles on monthly instalments has kept auto financing afloat. Otherwise, they said, the demand for new vehicles would have been negligible due to a steep rise in their prices and the shrinking buying power of many consumers, exacerbated by soaring utility bills.
Ahmed Shamim, a private banker overseeing auto leasing, said it is challenging to share information regarding imported vehicles and their instalments following the revised prudential regulations by the SBP in September 2021, which also imposed a ban on financing imported vehicles.
He revealed that used cars are currently in high demand due to the revised SBP’s prudential regulations and a financing cap of Rs3 million of aggregate exposure.
He shared that the price of used 1000cc vehicles from 2015 to 2020 models ranges from Rs1.6m to 1.9m, with monthly instalments at around Rs40,000-50,000. The price of a five-year-old 660cc model would be a maximum of Rs2.1m and that of an Alto AGS/Auto and 1,000cc around Rs2.2m, with monthly instalments of approximately Rs55,000, he added.
Over the last six months, the Karachi Interbank Offered Rate (Kibor) has declined from 24.5 per cent to 21.70pc, aiding genuine consumers who need financing for either new or used vehicles. Banks have also reduced their profits and their fixed rates, which have proven beneficial.
Mr Shamim expressed the hope that Kibor may decline in the future, leading to revised instalments.
He noted that the salaried class earning between Rs150,000-Rs300,000 monthly applies for financing, while banks offer car financing of under Rs3m max (total aggregate exposure) as per central bank’s prudential regulations.
He added that Suzuki Alto 660cc, both brand new and used, is currently in high demand for leasing and financing by banks.
Mr Shamim said there might be some chances of a cut in the interest rate in the future. However, he stressed the need for revising prudential regulations to extend the financing cap from Rs3m to at least Rs9m minimum to enhance exposure for an individual in auto financing.
As per prudential regulations, vehicles with less than 1,000cc (locally assembled) could be financed with a minimum 30pc equity instead of 15pc, while the tenure has also been revised to five years from seven years max.
For vehicles above 1,000cc, the tenure is three years instead of seven years max. These changes in tenure and the cap on the aggregate debt burden ratio have posed challenges for buyers.
Auto financing has consequently plunged for the 21st month ending March 2024 to Rs239 billion, down by 1.4pc or Rs3.5bn month-on-month. According to data issued by the SBP, the total decline in the past 21 months stood at Rs128bn, from Rs368bn at the end of June 2022.
An authorised dealer of locally assembled vehicles confirmed that only second-hand vehicles are being financed, while financing requests from consumers for new vehicles have been negligible due to extremely high prices and a 22pc interest rate.
“My showroom finances one to three new locally assembled vehicles every month,” he said, citing high power, gas, and food bills as forcing consumers to first manage the amount for these necessities before looking for other requirements.
Currently, corporate buying accounts for over 60pc of the sale of new cars and other vehicles, with the rest of the share going to individual cash buying.
The dealer said as inflation shows signs of slowing down in the coming months, stagnant consumer income continues to hinder the purchase of new cars.
Mashood Ali Khan, a local auto part maker and exporter, believed that only a single-digit interest rate can revive auto financing in new vehicles.
He urges the government to lower taxes and duties on locally produced vehicles in the upcoming budget to help reduce prices and revive dwindling sales.
Published in Dawn, April 28th, 2024