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Explainer: What does State Bank’s new car financing restrictions mean?

Locally-manufactured 1000cc and below cars may get a boost

SAMAA | - Posted: Sep 28, 2021 | Last Updated: 2 months ago
Posted: Sep 28, 2021 | Last Updated: 2 months ago

If you are planning to get your car financed from a bank then be ready to double the down payment amount as the State Bank of Pakistan (SBP) has increased the minimum down payment cap to 30%. Previously, it was 15 %.

This means if you want to buy a vehicle worth Rs2million, you will have to pay Rs600,000 as initial or down payment. Earlier, this would have been half, i.e. Rs300,000.

The central bank also reduced the tenure for auto loan repayment by two years. Now you will have to repay the loan on your car in five years. Earlier, you had seven years to repay the loan.

Lesser the time to pay, higher the monthly installment will be.

The bank has also decided to reduce the debt-burden ratio from 50% to 40%. For example, if a person earns Rs100,000 a month, then they will be eligible for a monthly instalment of not more than Rs40,000. At the previous rate, this would have been Rs50,000.

The auto financing limits have also been capped to Rs3 million. It means a person cannot take a loan of more than Rs3 million at a given point in time.

Which cars will be most affected?

According to analysts, new restrictions will affect demand for big cars that cost over Rs4 million. Sedans such as Honda Civic, Toyota Corolla, Hyundai Elantra, Sonata and the crossovers such as Kia Sportage, Hyundai Tucson, MG Motors’ MG HS and Toyota Fortuner may see their sales get affected.

Moreover, the State Bank has restricted banks from giving auto financing facilities for imported cars. This means you can no longer get imported vehicles such as Mira, Days, Vitz and Aqua financed by the banks.

“This will mainly reduce consumer choice,” said Research Analyst Taha Madani. “People buying cars through auto financing would now be restricted to buy locally assembled cars.”

All Pakistan Motor Dealers Association Chairman HM Shahzad said that the imported used car segment may see their sales decline by up to 20%. He said that around 20% imported car buyers opt for auto financing.

Madani said that the buyers who would have financed imported cars would now move to locally-assembled cars, especially the category of 1000cc and below engine capacity.  

Why State Bank imposed restrictions on auto financing?

One of the reasons for the rise in inflation is the increase in imports, which increases the trade deficit. This is because exports have not been increasing at the same pace as imports. The trade deficit – imports minus exports was over $4 billion in August. It is also straining the dollar rate.

Pakistan’s auto sector heavily depends on imports. The steel used in making cars and many high-value parts, such as the ones used in engines, are imported.

Senior Research Analyst Ahmed Lakhani said that Pakistan’s auto sector mainly imports parts that are technology intensive. It means parts, which need very high investment in machinery for their production. Therefore, they are expensive.

“On an average, locally-assembled cars have between 50% and 70% imported parts. But if we estimate the value of imported parts, then I think it can go up to 80% of the total cost of the car,” he said.         

Shahzad said that at least half of the total auto sales in Pakistan last year happened through auto financing. It was because the State Bank reduced the policy rate to 7% from a high of 13.25%. The bank rates for auto financing came down to between 10% and 11% from around  17%.

The State Bank has said that it was doing this to reduce imports by reducing demand for cars to eventually reduce the trade deficit.

“This targeted step will help to moderate demand growth in the economy, leading to slower import growth and thus supporting the balance-of-payments,” said the State Bank.

 Which cars will not get affected?

The auto financing restrictions will not affect the sales of locally-manufactured cars below 1000cc engine capacity. These include cars such as Suzuki Alto, Cultus, Wagon R, Kia Picanto and United Bravo.

The State Bank said it wants to protect lower- to middle-income groups, therefore, the new regulation will not be applicable on the comparatively inexpensive 1000cc and below segment.

The new regulations will also not be applicable on locally-manufactured electric vehicles. The State Bank said it wants to promote use of clean energy.

“Further, in order to encourage Roshan Digital Accounts and facilitate overseas Pakistanis who have opened these accounts, regulatory instructions for Roshan Apni Car products of the banks or DFIs have not been changed,” the State Bank says.

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One Comment

  1. AAM  September 28, 2021 11:04 pm/ Reply

    If all thiis is being done to curb the imports, then the car manufactrers who make cars above 1000cc will be greatlt effected by it. It means that people will buy more 1000cc or less powered cars. This would ultimately effect high end manufactrers and would lead them to lossess. Previously a middle income person was also able to afford cars of 1300 to 1600 cc, but now this segment will remain only accessiable to high income group people who are very less in numbers out of thw total population of Pakistan. If government needed to boost their exports and bring the import export deficit in balance, then they should have revamp their export policy and should have targetted more specifically to textile industry which is the biggest exporters by giving various incentives and tax reduction to them.

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car financing, car financing policy, auto policy, auto financing policy, state bank of Pakistan, SBP,Suzuki, Honda, Toyota, Mira, WagonR

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