Auto-financing by conventional and Islamic banks in Pakistan has reached all-time high levels.
According to recent State Bank of Pakistan statistics, the banking industry financing surged to Rs. 193 billion at end of the financial year 2017-18 with a whopping increase of Rs. 43.316 billion, the highest ever jump recorded in the history of the banking industry in one financial year.
Previously in 2016-17, the banking industry financing to customers for auto purchases had increased by Rs38.32 billion to reach a level of Rs. 150 billion.
Banks have been aggressively extending loans for auto financing due over the past 2 years due to strong demand. Lower interest and financing rates have attracted a large number of customers for purchasing vehicles through banks for both personal and commercial purposes.
During the period, the discount rates were stable at 42-years low levels at 5.75 percent.
Banks would offer KIBOR plus 4 to 6 percent, resulting in markup and financing rates of 10 to 12 percent. Some of the banks introduced corporate and special deals of 7.5 percent for limited time period in order to attract customers towards their services.
Carpooling Services Become Catalyst for Growth in Auto-Finance
Ride-hailing services such as Careem and Uber have played an instrumental role in boosting financing services from different commercial banks.
The trends have been increasing mainly in major cities such as Karachi, Lahore, and Islamabad which received an overwhelming demand for these cab services.
Background Of The Growth & Fall in Auto-Financing
A couple of banks started auto-financing in early 2000 and the schemes became popular among the high-income and upper-middle class groups. In addition, commercial vehicles were also part of this business of the banks.
According to available data, the banking industry first touched the mark of Rs. 100 billion in the financial year 2007-08, and closed the year at Rs. 105 billion. The discount rates increased to 10 to 14 percent during the period of FY08 to FY10, which jacked up the markup rate substantially on auto-financing like many other products and borrowing by banks.
Afterward, the banking industry financing to automobile not only dropped gradually but it incurred losses in terms of Non-Performing Loans (NPLs). High marked-up and financing rates including high values of cars even pushed many banks to stop the service of financing of cars completely. Few banks continued this product in commercial sector though.
By the end of FY12, the value of auto-financing reduced to Rs. 44 billion in the banking industry. The discount rates increased to 10 to 14 percent hence the interest rates were considered very high in the market.
By end of FY14, fewer of the banks received an increase in the demand for loans and financing for passenger cars, light commercial and heavy vehicles which improved the values by Rs. 64 billion. The discount rates reduced to 12 percent till FY12 and to 10 till FY14.
The banking industry again picked up the pace after FY14 and it touched a level of Rs. 100 billion again by March 2016 mainly due to soft monetary policy, which resulted in low markup rates. And then, the momentum continued at accelerated pace within the banking industry.
Limited Banks Are Active in the Market
Surprisingly, only eight banks account for around 70 percent of the outstanding auto loans and financing over the last couple of years, according to SBP numbers.
Islamic banks are more active because of the nature of the products and the presence of high liquidity. Auto-finance is the major products for Islamic banks to earn margins whereas few conventional banks have been active too mainly through lower markup rate offers and aggressive facilitative and marketing approach.
Issues and Challenges
The discount rates have been increased by 1.75 percent in the recent three monetary policies. Also, the prices of cars have been increased many times since January 2018. These two factors will likely affect the growth being seen by the industry.
On the other hand, the untimely availability of the cars from local manufacturers and importers slowed down the process of purchasing passengers cars, especially small and medium range models.
Banks like JS Bank and UBL joined hands to work with ride-hailing services to provide care to their captains at easy installments under PM Youth Business Loan scheme with rates standing at 6 percent.
Hence, the financing value under auto-financing may not pick up the pace.
These eight banks, which have captured the big chunk of the market, will retain their role with the diversification of the products such as the introduction of auto-financing in luxury cars. JS Bank and Dubai Islamic Banks introduced auto-financing for high-end and luxury brands such as Porsche and Audi.
These banks will also continue their auto-financing to the corporate and commercial sector through various deals in order to maintain their position in the market. Some of the banks especially Islamic banks are also providing financing for motorcycles which will likely continue without major upsets.
What Could be Next?
More banks should come into this auto finance product instead of a few selected banks. These banks could play an instrumental role in auto-financing of all categories through motorbikes to passengers’ cars, sports and luxury cars, light to heavy commercial vehicles.
State Bank of Pakistan (SBP) should set targets for every bank for achieving a minimum target to enhance the competition within the banking industry in coming months with the expansion of automobile industry in the country. Especially the services should be promoted in other unexplored cities of the country besides metropolis.
It should also set up a check and balance mechanism on the banks for slapping hidden and extra charges on the customers and create awareness of the public for smart budgeting of their income for availing banks financing services to benefit a large segment of the country.