September 24, 2021 (MLN): The not-so-appealing macros could be a potential threat to the economic outlook of the country if not intervened at the right time.
To rein back the ballooning trade deficit, surging demand for dollar in the interbank market amid a colossal rise in import bill, the State Bank of Pakistan (SBP), while playing its due role, has revised the prudential regulations (PRs) on the side of Consumer Financing Loans.
The major changes in the regulations of auto financing include the maximum tenure of auto financing which has been reduced from seven years to five years. The amount of auto financing outstanding shall not exceed Rs3 million at any given point in time. Previously, there was no limit on the amount of auto financing.
Moreover, the minimum down payment requirement has increased from 15% to 30% on the value of the vehicle only. The banks/DFIs shall not finance any premium amount charged by dealers and investors over and above the ex-factory tax-paid price of vehicles. In addition, the new and old imported cars shall not be eligible for auto financing from now onwards.
To note, the afore-mentioned revised regulations will not be applicable on locally assembled/manufactured vehicles up to 1000cc, locally assembled/manufactured Electric vehicles, and the Roshan Apni Car scheme.
As per the statement issued by SBP on Thursday, this targeted step will help to moderate demand growth in the economy, leading to slower import growth which will support the balance of payment.
However, the market experts foresee that the impact of SBP’s intervention will be marginal on the overall car sales. Speaking to Mettis Global, Khurram Shahzad, Financial Expert indicated that a low motorization level (17 cars per 1000 persons) will not allow a big jolt to the auto industry of Pakistan under the new issue guidelines by SBP.
Meanwhile, the revision in PRs is largely tilted to the financing facility of above 1000 cc cars which would also limit the impact across the industry. Particularly, PSMC will be completely exempted from any jittery effect as it only deals in 1000cc cars, he added.
The focus of the government is shifting towards consolidation from a growth-oriented approach. As a result, SBP had to take this step to halt the swelling stress of automobiles on imports. Given the revised PRs, SUVs and Sedans over Rs5million will face a negative impact as the buyer will have to increase the size of the initial down payment that would surely curtail the demand for these vehicles, stated by Arsalan Siddiqui, Head of Business Development at Foundation Securities while speaking to Mettis Global.
The sector has been witnessing remarkable demand for the past few months but the revision in PRs will somehow restrict the growth of the auto sector, he noted.
“In the whole scheme of things, it might not have a massive impact on imports as the consumer & auto finance combined makes up only 8.6% of private-sector loans. However, it would have a material impact on the auto industry as auto financing makes up around 35-40% of the total car sales,” Muqeet Naeem, Research Analyst at Ismail Iqbal Securities said.
From the financial blueprint, original equipment manufacturer's (OEMs) margins are likely to reflect a lower base in coming quarters, with low pricing power amidst government pricing interventions profoundly dampening margins with higher freight costs compounding the pressure in the near term. That said, lower volumes are likely to smoothen the impact, in part through lower carry of raw material inventories and higher financial cost on advances received from consumers against deliveries.
Against this backdrop, OEMs with a strong pipeline of new models are likely to wither current business dynamics through strong pricing arrangements, and a healthy cashflow profile, Saraosh Saleem, Investment Analyst at AKD Securities noted.
The revised PRs will likely influence the major market players including INDU and HACAR as their vehicles. On the other hand, the PSMC will not see any notable impact as the company is engaged with the manufacturing of below 1000cc cars.
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