ISLAMABAD: Alarming increase in trade and current account deficits has forced the State Bank of Pakistan (SBP) to discourage import of cars by directing banks not to provide financing any more on the import of vehicles.
In a statement issued today, State Bank said it has revised prudential regulations for consumer financing.
“This targeted step will help moderate demand growth in the economy, leading to slower import growth and thus supporting the balance-of-payments,” said the SBP.
Interestingly, the import of road motor vehicles in financial year 2020-21 has almost doubled, to $2.142 billion in comparison with $1.276 billion imports in 2012-20. During July-Aug FY22 the import of the same was of $495 million compared to $160 million in the same period of last year.
At present, Pakistan is facing a problem of balance of payments with a burgeoning trade deficit due to very high import growth which was earlier termed essential for economic growth. The current account deficit rose to $1.5 billion alone in August indicating it may surpass the SBP’s projection of 2 to 3pc of GDP for FY22 with a wide margin. The current trend clearly shows a much higher deficit is awaiting the country.
State Bank said, “The changes in the prudential regulations effectively prohibit financing for imported vehicles, and tighten regulatory requirements for financing of domestically manufactured or assembled vehicles of more than 1,000cc engine capacity and other consumer finance facilities like personal loans and credit cards.”
According to new changes, the maximum tenure of auto finance has been reduced from seven to five years. Auto industry is flourishing while the demand is still very high.
Maximum tenure of personal loan has been reduced from five to four years — another step to curtail higher use of personal loans which has been used to buy vehicles. The amended regulations said the maximum debt-burden ratio, allowed to a borrower, has been decreased from 50 to 40pc.
It further said that overall auto financing limits availed by one person from all banks and DFIs, in aggregate, will not exceed Rs3,000,000 at any point in time while minimum down payment for auto financing has been increased from 15pc to 30pc.
“All these steps have been taken to slow down imported vehicles and easy financing for it. It will work to reduce the buying of imported as well as local luxury vehicles,” said Samiullah Tariq, head of research at Pak-Kuwait Investment Company.
He said the demand for cars is high and it takes up to six months to receive a car after buying it from a company. The easy access to financing was one of the reasons for higher demand which was curtailed by reducing the amount of financing and tenure of financing.
Analysts also pointed out that the recent increase in the interest rate should also be seen in the same background — the costly money would reduce financing to consumers. The SBP increased the interest rate by 25 basis points to 7.25pc.
The State Bank further said that with the objective to protect lower to middle income category purchases, these new regulations are not applicable to locally manufactured or assembled vehicles of up to 1,000cc engine capacity.
“They are also not applicable to locally manufactured electric vehicles to promote use of clean energy,” said the SBP, adding that the financing of these two categories of vehicles will continue to be governed by previous set of regulations.
“In order to encourage Roshan Digital Accounts and facilitate overseas Pakistan who have opened these accounts, regulatory instructions for Roshan Apni Car product of the banks or DFIs have also not been changed,” said the SBP.
Analysts said the impact of the amendments in the prudential regulations would be visible after couple of months but it would not slow down the economic activities.
