KARACHI, December 09 2024: The State Bank of Pakistan (SBP) is considering a re-evaluation of the Rs3 million cap on auto financing, following recent positive trends in the auto financing sector. After a prolonged period of decline over 26 consecutive months, auto financing numbers have shown month-on-month (MoM) growth for the past two months. This recovery is largely attributed to a reduction in policy rates by 7% and aggressive lending by banks aiming to meet the Advance to Deposit Ratio (ADR) target by December 31, 2024.
Recovery in Auto Financing
The auto financing market, historically a key contributor to auto sales in Pakistan, had seen a steady decline in recent years, primarily due to high interest rates and economic pressures. When interest rates were in single digits, auto financing accounted for around 30% of total vehicle sales. However, with interest rates rising, this share has likely fallen into the lower double digits. The recent policy rate cuts have breathed new life into the sector, causing an uptick in financing, which has prompted discussions about revisiting the cap on auto loans.
The Impact of the Rs3 Million Cap
Introduced in September 2021, the Rs3 million cap on auto financing initially applied to vehicles over 1000cc, but was later expanded in May 2022 to include all vehicles. Since then, car prices have risen significantly, partly as a result of inflation and fluctuating exchange rates, making the cap more restrictive for consumers. The cap, intended as a measure to curb inflationary pressures and reduce the impact of a widening Current Account Deficit (CAD), has now come under scrutiny as macroeconomic conditions improve.
Macroeconomic Shifts Favoring a Review
Since the cap was implemented, Pakistan’s macroeconomic landscape has seen considerable changes. The country’s Current Account Deficit (CAD), which stood at US$5.3 billion in the first four months of FY22, has significantly narrowed to a Current Account Surplus (CAS) of US$218 million in the first four months of FY25. This shift in macroeconomic fundamentals has led to a growing belief that the conditions may now be more favorable for revisiting the auto financing cap.
Future Outlook and SBP’s Considerations
With the economic environment improving and auto financing showing signs of recovery, the SBP may soon consider lifting or modifying the cap. A relaxation or revision of the cap could further stimulate auto sales, providing a much-needed boost to the automotive sector, which has struggled in recent years. However, the SBP will likely weigh the potential risks, including inflationary pressures, before making any decisions.
In conclusion, the possibility of re-evaluating the auto-financing cap marks an important development in Pakistan’s financial and automotive sectors. The decision will depend on how the SBP balances economic recovery with its monetary policy goals, including managing inflation and ensuring financial stability.
