Car Sales to Slow Down Due to Auto Financing Restrictions

Sales of new cars in Pakistan are expected to witness another speed bump as State Bank of Pakistan (SBP) has recently made changes in prudential regulations and reduced the auto financing limit and period, on the back of inflated trade and current account deficits.

To begin with, minimum required down payment has been increased from 15% to 30%. Which means if you were out to buy a car worth PKR 30 lac, you will now need at least Rs 9 lac for minimum down payment compared to Rs 4.5 lac as per the previous 15% condition. Furthermore, the maximum tenure of auto financing has now been reduced from 7 years to 5 years, which means the monthly installments will become higher than before.

Related: SBP Puts Restrictions on Financing of Imported Vehicles

Plus, the maxi­mum debt-burden ratio, allowed to a borrower, has been decreased from 50 to 40%. This means if a person earns Rs 100,000 a month, then he will be eligible for a monthly installment of maximum Rs 40,000 which was previously Rs 50,000. Additionally, auto financing limits availed by one person from all banks in aggregate, will not exceed Rs 30 lac at any point in time. Simply put, a person cannot take a car loan of more than Rs 3 million. The above is applicable to domestically assembled vehicles of more than 1,000cc engine capacity.

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A lot of CBU imported Haval H6 which cost PKR 6.8 million

Lastly, financing for imported vehicles has been completely prohibited regardless of engine capacity which means you cannot avail auto financing for any imported vehicle, whether a small hatchback, a sedan or even a crossover SUV. While CBU imported options such as the MG HS, Haval H6 & Jolion, Corolla Cross and Proton X70 are sure to feel the heat, expensive local assembled options such as Hyundai Tucson & Elantra, Kia Sportage & Sorento, Toyota Corolla, Honda Civic and DFSK Glory 580 & 580 Pro etc are going to suffer in terms of sales as well.

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A birds-eye view of tons of imported MG cars parked at Karachi port

However on the flip side, the regulations are also not applicable to locally manufactured electric vehicles (EVs) to promote use of clean energy, according to the SBP, adding that the financing of EVs & below 1,000cc categories of vehicles will continue to be governed by previous set of regulations. Furthermore, in order to encourage Roshan Digital Accounts and facilitate overseas Pakistan who have opened these accounts, regulatory instructions for Roshan Apni Car product of the banks or DFIs have also not been changed.


Roshan Apni Car

These measures by SBP have been taken to control current account deficits. One of the key reasons behind this is the heavy increase in imports, which ultimately increases the trade deficit that was over $4 billion in August and is also stressing the dollar rate. Pakistan’s local auto industry remains heavily dependent on imports, be it in the form of CKD/ SKD or even raw materials, however the recent influx of import-dependent newcomers & costly CBUs have made things even worse.

Related: Auto Imports Grew by 83% in 11M-FY20-21

Earlier in June, SBP revealed  that auto financing had reached record high of Rs 308 billion as of June 2021, witnessing a 46% year-on-year increase. Despite high prices of locally-assembled cars followed by delayed deliveries and hefty premiums/ own money, buyers remained eager to cash in on the opportunity of low interest rate which came down from 13.5% to 7% in March 2020. However the latest changes in regulations and reduced auto financing limit and period is expected to cast a negative effect on vehicle financing & sales in the country.

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