State Bank of Pakistan (SBP) has made changes in prudential regulations and reduced the financing limit and period, particularly for imported vehicles on the back of inflated trade and current account deficits. According to SBP:
“This targeted step (of revised prudential regulations for consumer financing) will help moderate demand growth in the economy, leading to slower import growth and thus supporting the balance-of-payments”
Pakistan is facing a serious problem of balance of payments with a burgeoning trade deficit due to very high import rate which was earlier termed essential for economic growth. The current account deficit rose to $1.5bn alone in August indicating it may surpass the SBP’s projection of 2- to 3% of GDP for FY22 with a wide margin. The current trend clearly shows a much higher deficit is awaiting the country.
Related: Car Financing Hit Record High
The changes in the prudential regulations include:
- Prohibit financing for imported vehicles, and tighten regulatory requirements for financing of domestically manufactured or assembled vehicles of more than 1,000cc engine capacity and other consumer finance facilities like personal loans and credit cards.
- According to new changes, the maximum tenure of auto finance has been reduced from 7 to 5 years. According to SBP, auto industry is flourishing while the demand is still very high.
- Maximum tenure of personal loan has been reduced from 5 to 4 years — another step to curtail higher use of personal loans which has been used to buy vehicles.
- The maximum debt-burden ratio, allowed to a borrower, has been decreased from 50 to 40%.
- Overall auto financing limits availed by one person from all banks and DFIs, in aggregate, will not exceed Rs 3,000,000 at any point in time while minimum down payment for auto financing has been increased from 15% to 30%.
The State Bank further said that with the objective to protect lower to middle income category purchases, these new regulations are not applicable to locally manufactured or assembled vehicles of up to 1,000cc engine capacity. Additionally, the regulations are also not applicable to locally manufactured electric vehicles to promote use of clean energy, said the SBP, adding that the financing of these two 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. According to analysts, the impact of the amendments in the prudential regulations would be visible after couple of months but it would not slow down the economic activities.
The import of motor vehicles in FY21 was of $2.142bn compared to $1.276bn in the preceding year reflecting the high growth of import. During July-Aug FY22 the import of the same was of $495m compared to $160m in the same period of last year.
A 3d animation professional with over 20 years of industry experience having served in leading organizations & production facilities of Pakistan, an avid car enthusiast and petrolhead with an affection to deliver writings to help shape opinions. Formerly written for PakWheels as well as major publications including Dawn. Founder of CarSpiritPK.com