Auto financing by banks hit an all-time high of Rs 297.5 billion in FY 2020-21, as Pakistani consumers took advantage of the car financing option at a comparatively cheap interest rate. Auto financing in Pakistan is available at low interest rate in spite of the Covid-19 pandemic related financial risks.
The launch of new models and brands by new entrants into the domestic auto market was the driving force behind the record-breaking auto loans.
According to the State Bank of Pakistan (SBP), auto financing by banks increased by Rs. 86.5 billion (41%) between July and May of FY 2020-21, to Rs. 279.5 billion in May 2021, up from Rs. 211.11 billion at the end of FY 2019-20.
The country’s auto financing activity rose in Q2 FY 2020-21, thanks to a steady rupee-dollar exchange rate, which aided growth in the vehicle sector because the bulk of car parts are imported.
Automobiles with engines of 1,000cc or more, as well as SUVs, were the main drivers of increased auto loans in Q2 FY 2020-21.
A decrease in interest rates, a steady currency rate, and increased competition owing to new entrants all contributed to a good impact on bank vehicle finance in the country.
During President Musharraf’s time, banks issued auto financing without confirming the customers’ ability to repay them, which resulted in a similar increase in auto finance. However, a large number of borrowers failed to pay off their auto loans, raising concerns about the banks’ decision.
The significant cut in the benchmark interest rate by 625 basis points during March-June 2020 to 7% till today have created such huge demand for auto financing. “Banks have passed on the benefit of the rate cut to auto consumers. This has made the car financing products attractive,” said Meezan Bank Product Development and Shariah Compliance Senior Executive Vice President Ahmed Ali Siddiqui.