SBP tightens consumer lending rules to limit car finance

Car Finance

With the introduction of Auto Policy 2016-2021, Pakistan grabbed many renowned brand under the policy which was a significant boom to the auto industry in the country. Apart from that, banks offered low interest rates as government urged to lower the interest rates. According to an estimation, around 50% of the auto industry is dependent on car finance. 

Vehicle and Car Finance Boost 

When coronavirus emerged in 2019, the auto sales went down drastically, however, to help the manufacturers, government lower down the interest to from 13.5% to 7%. Through this the vehicle and auto finance demand surged immediately.  

Read more: Auto Financing by banks hit an all-time high

In addition, the State Bank of Pakistan also released data that car finance in Pakistan has stretched to Rs. 285 in March 2021, which was the all-time high. 

Trade Imbalance & Inflation  

Despite the fact that there are many other products on the list of imports, the import of kits for local assembly as well as parts and fully assembled automobiles contributed significantly to the current account deficit due to outflow. To put it another way, Pakistan spent more money abroad than it earned. Over 9200 automobiles were imported in the first two months of the current fiscal year, with 3000 of them being brand new imports. 

Even though a spike in CBU and CKD imports may indicate an increase in local economic activity and growth, the lower value of exports in the equation automatically produced a trade imbalance, leading the devaluation of the Pakistani rupee and rising inflation. 

The Finance Ministry has been working on ways to curb the import of non-essential items for some weeks, and hiking import taxes is on the agenda. Although automobiles are in high demand in Pakistan, it appears that the government considers them to be a non-essential item, particularly CBU vehicles. The Finance Minister also indicated at adopting measures to limit needless imports. 

New Regulations by SBP on Car Finance  

Now, on September 23, 2021, State Bank published a circular to all banks and other financial institutions, outlining some new requirements for consumer finance, particularly auto loans. The following are the amended Prudential Regulations for Consumer Financing (PRCF). 

  • The total monthly amortization payments of consumer financing facilities, as prescribed in paragraph 1 of the regulation, should not exceed 40% of the net disposal income of the prospective borrower. Similarly, in paragraph 3 of the regulation Debt Burden Ratio for Consumer Financing may be read as 40 % instead of 50 %. 
  • The maximum tenure of the auto finance facility is reduced from 7 years to 5 years. 
  • The minimum down payment is increased from 15%to 30 % of the value of vehicle. 
  • Overall auto loans/financing limits availed by one person from all banks/DFIs, in aggregate, shall not exceed Rs3,000,000/-, at any point in time. However, the financing limit of borrowers whose approved limit already exceeds Rs3,000,000/- may be amortized as per existing terms and the same shall not be further increased. 
  • New as well as used imported vehicles shall not be eligible for auto financing from banks/DFIs 

The State Bank of Pakistan (SBP) further noted and emphasized that the proposed modifications will not apply under the following circumstances: 

  • Financing for locally assembled/manufactured vehicles of up-to 1000cc engine capacity. 
  • Roshan Apni Car product of banks . 
  • Locally assembled/manufactured Electric Vehicles. Accordingly, these financings will continue to be governed by PRCF existing prior to these amendments. Besides, the regulatory treatment of Roshan Apni Car product already communicated to RDA participant banks will continue to remain effective. 

As per State Bank of Pakistan, the above amendments in PRCF shall be applicable with immediate effect, on new financing facilities. All other instructions on the subject shall, however, remain unchanged.  

Limitations for Banks Over Car Finance

Banks will no longer be allowed to finance CBU vehicles, including Electric Vehicles, regardless of battery capacity, new or used, in order to regulate the import of CBU vehicles. This is also good news for certain new auto manufacturers that have already been granted Green Field status under the Auto Policy but are instead importing fully assembled vehicles. Moreover, this new rule will also compel them to work more quickly on local assembly.  

Bonus for Middle Class? 

All of these new laws will not apply to middle-class and low-income individuals who are looking for a compact entry-level vehicle which are 1000cc or below. 

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