![]() ![]() Since it is both a necessary means of transport in a country with no walkable cities or viable public transport, as well as a hedge against inflation, people will take out loans to get cars over anything else. In addition to this, in what is a peculiarity of our auto market, cars are considered both an asset class and a necessity in Pakistan. A house of one’s own and a car at the end of a salaried career is the height of most upper-middle class aspirations. As the graph of the SBP’s total credit in circulation data below shows, a majority of current loans in circulation are for cars. On average, 40percent of all personal finance loans in the past year and a half were auto loans. In comparison, total consumer finance loans taken for housing in the same time period amounted to Rs 281 billion. Over the course of the past 18 months, from January 2021 to June 2022, Rs 111 billion auto-loans have been dispersed by all banks for auto loans. Profit investigates the state of the auto-loan market, to assess the likelihood of this happening all over again. Others said that while the circumstances were similar to 2008, market dynamics have changed since then, with banks becoming more prudent about who they lend to, which means defaults will happen but minimally. Some said it could happen within six months. ![]() ![]() Profit spoke to bankers and investment professionals to determine whether the auto-loans market is once again headed towards a similar situation. Sound familiar? Yes, the set of circumstances that led to nearly half of all personal finance related loans defaulting in 2008 are eerily similar to the circumstances in the country right now. In 2018, for example, the policy rate shot up from 6pc to 13.25pc in a matter of 18 months, sharply slowing the economy and leading to a rising “infection ratio” in the banks as the cost of borrowed funds spiked with this rise. There have been two other episodes of sharply rising rates in the recent past. From 7 percent last July, the key Policy Rate shot up to 15pc by July 2022. Interest rates have shot up in the past one year at a virtually unprecedented rate. There was an economic crisis led by inflation, interest rates were hiked rapidly to reach an all time high, the country was roiled by political turmoil, and fuel prices were high after being artificially deflated earlier. The reason behind the default was pretty standard. Back then, according to a 2011 report of the State Bank of Pakistan (SBP), nearly 50% of all personal finance loans defaulted. The last time the auto loans were swept by a wave of defaults was in the aftermath of the financial crisis of 2008. If this happens, it will not be the first time Pakistan’s auto-loans market has seen large scale defaults. On top of this, when the banks come knocking with massive auto-loan bills, people will have difficulty repaying the loans, raising the spectre of rising defaults in consumer loans. ![]() General inflation has already led people to tighten their purse-strings, leading to low purchasing power. How much, you ask? Profit calculates that customers with auto loans taken in 2021 on 5 year tenors could see a 30-35% increase in their monthly payments going forward. How will this play out?īecause of rising inflation, and the spiking cost of borrowing money after the massive increases in the policy rate over the past one year, people that have had their cars financed by banks will suddenly find that their monthly payments have skyrocketed. There are now murmurings in the banking industry, and all of them point towards the same thing - sometime in the next six months the auto-loans market will receive a stress test. This is a decade after it last did so in 2008, and this time it happened almost instantly.There will indeed be a shock for the economy like no other. The State Bank of Pakistan’s (SBP) policy rate has hit 15%. ![]()
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