ANALYSIS: The not-so-affordable future of car finance – Journal
A senior local entrepreneur, Mr Qamar Khan, is one of many people trying to upgrade from a Suzuki Swift to a Kia Sportage via a bank finance facility since February.
After a meteoric rise in price to Rs5.4m from Rs4,756m in the Kia Sportage over the past few months, followed by an increase in the interest rate, he finally decided to put his plans aside.
“I can’t buy at this huge price. The rest of the damage was caused by a recent 1.5% increase in the interest rate to 13.75%, followed by a reduction in the financing term from five to three years on vehicles over 1,000 cm3, making the monthly payments unmanageable,” he said angrily.
Reducing the term from five years to three years means that a buyer must manage an additional monthly amount in the impending uncertainty of further interest rate hikes, rising prices and new restrictions on car financing to control the current account deficit, Mr. Khan said.
Banker says consumer auto financing cut to 20% after SBP revisions
Ahmed Shamim, southern regional director of the Consumer Auto Finance department at Dubai Islamic Bank Pakistan Limited, said consumer auto finance fell to 20% after the revision of the State Bank’s prudential regulations. Vehicles under 1,000cc (locally assembled) could be financed with a minimum of 30% equity instead of 15% and a term also revised to five years instead of seven years.
He claims that the debt ratio cap of 40% and a minimum down payment of 30% makes it impossible for an average middle-class person earning Rs 100,000 a month to get car finance.
Vehicles over 1,000cc can be financed with a cap, but the duration will be three years instead of five. Changes in occupancy and the cap on the overall debt ratio have a direct impact on businesses, which is actually problematic for the middle-class person who wants to get financing for a car, Shamim said.
He added that Kibor’s impact would definitely be reviewed after six months or 12 months, whichever comes first, but debt burden caps, global exposure limitations and maximum down payment with minimum tenor affect auto finance companies directly.
He said there was a need to revise the finance cap from Rs3m to Rs7m tenor for all vehicles and the debt burden ratio to 50pc from 40pc to facilitate car finance consumers.
Mr Shamim said that for a middle class man with all other household expenses, it is now very difficult for an individual to bear the burden of monthly expenses due to strict prudential regulations, which he cannot even use for a mini car through car financing.
A private banker specializing in auto finance said: “It looks like we are unlikely to hit our target in June after interest rates have risen again and months for installments have been reduced.
Seeking anonymity, he said assemblers are a bit relaxed now due to the backlog of advance bookings in their hands that range in delivery time between two and nine months. The impact of high interest rates and shorter monthly terms will no doubt be felt in the coming months.
He said that with food inflation already high and a possible further rise in prices of essentials after a massive increase in oil prices, it would make it even more difficult to manage consumers’ household budgets. This would make them more reluctant to accept car financing, he added.
Mr Saqib Wasim said: ‘I canceled plans to purchase a new Suzuki Ravi and Toyota crew cab for my ‘rental business’ shortly after interest rates rose again and prices increased. monthly payments after a reduction in the duration of payment of the monthly payments. ”
Another private banker who specializes in car finance said footfall in banks for car finance fell significantly after a recent hike in the key rate. In addition, the ban on the import of used cars has put another blow to car financing.
“The bank is charging an interest rate of 18% versus 14%, which will be difficult for many consumers to pay,” he added.
“The trend has reversed. We look to buyers as last year buyers came in droves for auto finance,” he said.
Carfirst founder and CEO Raja Murad Khan said as new locally assembled cars become more expensive several times a year, the used car market will continue to bear the brunt. Used cars also tend to become more and more expensive.
A locally assembled three-year-old Honda Civic now sells for Rs4m, but a new one now costs more than Rs6m.
The average price of a used vehicle is not less than 1.9 million rupees, which was 1.1 million rupees three years ago.
The demand for used vehicles has increased dramatically as a number of people cannot afford expensive locally assembled cars. Due to high demand, used car prices have also increased at the level of locally assembled cars, he said.
“Demand for used cars and even 660cc to 1000cc is likely to increase further after the Rs 30 per liter rise in petrol prices, while further price shocks are expected” , Mr. Raja said, anticipating a further rise in used car prices.
Many people, while unable to afford new, locally assembled cars, are quickly turning to used cars, especially in the 660cc-1000cc class.
He claimed that his company was getting purchase inquiries from buyers in the price range ranging from Rs 1.5 million for small cars to Rs 3.5 million for high engined used vehicles of the models. 2014 to 2017. Three years ago, this price fluctuated between Rs1m and Rs2.5m.
Asked about the impact of high interest rates on the sale of new cars, he said: “I’m sure the impact of rising interest rates on car sales through bank financing will not will not be as intense as long as the old tradition of high demand and low supply from assemblers continues to persist in the future as well,” he said.
Indus Motor Company (IMC) told analysts at a company briefing a few days ago of an expected 25-30% decline in volumetric sales in FY23 due to higher prices. cars, an increase in interest rates and a reduction in the duration of consumer credit. Automotive financing holds a 26% share of IMC’s total sales.
Pak Suzuki Motor Company (PSMC), in a corporate briefing, forecast a 5-10% decline in sales in FY23. 35% of PSMC’s total sales come from consumer financing .
Posted in Dawn, May 29, 2022