Despite a significant reduction in Pakistan’s interest rate from 22% in June 2024 to 12%, the revival of auto financing remains sluggish. Consumers find monthly installments still burdensome or are anticipating further rate cuts before committing to car loans.
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In recent months, banks and automobile assemblers have intensified efforts to attract buyers through promotional offers and reduced financing costs. However, the market is rife with speculation about an additional 1% interest rate cut in the State Bank’s upcoming Monetary Policy Meeting in March, causing potential buyers to delay their decisions.
Industry experts note that individuals with substantial salaries in the corporate sector are engaging in auto financing, while the average citizen perceives the current interest rates as prohibitive. Banks typically charge 3-5% above the Karachi Interbank Offered Rate (Kibor).
For instance, financing a locally assembled Suzuki Alto VXL AGS 660cc, priced at Rs3.04 million, over five years with a 30% down payment results in monthly installments of approximately Rs56,000-57,000, including Takaful and tracker charges. Previously, with a 22% interest rate, these installments ranged between Rs68,000-70,000.
Similarly, a Toyota Yaris Ativ CVT 1.3, priced at Rs5.62 million, would require monthly installments of Rs112,000-115,000 under the same terms, down from Rs122,000-124,000 in June 2024.
A banker explained that a buyer without other financial obligations would need a monthly salary of at least Rs150,000 to afford the Suzuki 660cc’s installments.
Auto parts maker and exporter Mashood Ali Khan observed that individuals earning over Rs200,000 per month are more inclined towards auto financing, especially for smaller vehicles. Those earning less find car leasing unaffordable due to high living costs.
Ali Asghar Jamali, CEO of Indus Motor Company, noted that the share of auto financing in Toyota vehicle sales has only marginally increased from 20% to 24% following the interest rate cut, indicating minimal improvement. He remains hopeful that future rate reductions will bolster auto financing.
Looking ahead, Jamali anticipates a surge in car purchases leading up to the FY26 budget, driven by increased imports of parts, new model launches, and attractive financing packages. He suggests that a single-digit interest rate could significantly boost auto financing and vehicle sales.
Despite these developments, current sales of cars, light commercial vehicles, pickups, and vans remain well below the record 250,000 units sold post-COVID-19. Assemblers are striving to reach these figures again. The stabilization of the rupee against the dollar has helped keep vehicle prices in check, with some assemblers reducing prices to meet sales targets. Improved foreign exchange conditions have also facilitated the import of parts and accessories.
Recent weeks have seen a notable increase in bank financing, though many buyers are still waiting for further rate reductions. Dealers suggest that if the State Bank raises auto loan financing limits from Rs3 million to Rs5-6 million, it could positively impact car sales and auto loans.
According to State Bank of Pakistan data, outstanding loans for car purchases began to rise at the end of September 2024, reaching Rs227.54 billion, up from Rs227.29 billion in August. This figure climbed to Rs235.88 billion in October, dipped slightly to Rs234.64 billion in November, and improved to Rs235.45 billion in December 2024.
Auto financing peaked at Rs368 billion in June 2022 before entering a decline. An Insight Securities report attributes this to strict regulations introduced by the State Bank during FY22 to curb auto financing amid declining foreign exchange reserves. Measures included reducing repayment tenures, increasing down payment requirements, and capping maximum financing limits.
Historically, declining interest rates have spurred growth in auto financing, leading to higher auto sales. However, the effects of falling interest rates often take time to manifest. Data from the past decade indicates a lag of six to eight months between policy rate changes and auto financing growth, and a 10-12 month lag between policy rate adjustments and car sales increases.
