KARACHI – Seven leading commercial banks have totally suspended/stopped auto financing to the consumers in a bid to minimise risk of default amid the record high interest rates, slow demand in four-wheeler sales and increase in number of defaulters on the auto loans, market sources told The Nation on Thursday.
However, the full-fledged Islamic banks and some of the leasing companies are continuously providing auto financing facilities to their consumers with extremely cautious approach.
Currently, only Habib Bank Ltd is offering car financing service out of seven larger commercial banks. The branches of UBL, ABL, MCB Bank, Standard Charted Bank, Bank Alfalah Ltd, Askari Commercial Bank, NIB Bank and JS Bank Ltd have almost halted auto credit disbursement to consumers, said banking sources.
It is worth noting that Islamic banking windows of some of the commercial banks are offering “Car Ijara” mode of consumer loans with low overhead charges.
Within six Islamic banks, operating in Pakistan, Meezan Bank Limited is leading the way in Car Ijara Financing meanwhile Dubai Islamic Bank, Bank Islami and Emirates Global Islamic Bank are also in the race for providing auto loans.
Mounting inflation and increasing prices restrain the buyers to purchase locally produced/imported new branded cars of variant engine capacities on the one side but given the widening non-performing ratio of the commercial banks which surged to 212.3 billion rupees at the end of June 2008 as compared to 25.561 million rupees during the period under review caused the banks to bring to end auto financing services on the other, sources said. Due to the huge increase in regulatory import duty on purchase of above 1800cc vehicle to curtail import of such items, the car prices reached record high becoming out of the reach of the buyers.
The federal government had also imposed 5 per cent Federal Excise Duty (FED) and increased sales tax by 1 per cent on purchase of vehicles both imported and local. This is likely to keep volumetric sales for local auto assemblers under pressure.
The car dealers said that buyers prefer to avail Car Ijara Financing for the number of reasons such as affordable overhead charges with 20 percent down payment which can be paid after on-month instalment. While the conventional commercial banks were charging 16-19 percent mark-up rate on auto loans despite asking 10 percent down payment amount, upward one month instalment, with one-year insurance and registration charges. Albeit closing down auto loans, commercial banks are becoming more vigilant while extending the all categories of consumer loans in terms of housing and mortgage loans.
Since last year auto defaults have raised in auto loans hence commercial banks are in the process of recovering growing bad loans which is a big challenge for banks to meet.
The increase in interest rate played a pivotal role in restricting the demand for consumer loans during last calendar year. The impact of this restraint is more evident in auto loans as banks have even closed down financing schemes
Analyst said auto assemblers showed a lacklustre performance during the quarter ended on June 30 2008, as the net profit of the auto sector declined from Rs2.1billion in April -June 2007 to Rs828 million in April-June 2008, reflecting a phenomenal decline of 61 per cent. Declining volumetric sales amid rising costs were the main reasons behind this sharp fall.
Analysts attributed 14 per cent decline in volumetric sales to the halt in auto financing facilities, prolong political uncertainty, escalating inflation and increasing car prices.
Higher product prices, however, gave some support to the top line as rupee sales fell by only 6 per cent. Adding to the problems was increase in cost of sales causing a 700 bps decline in gross margins for the sector to 4.9 per cent, analysts added.
Source: The Nation, 12/9/2008