Auto financing picks up, but banks remain cautious

KARACHI: After a two-year gap, banks have started reviewing their policy on auto finance and have slightly increased auto financing with stringent conditions, said Atif Zafar, auto analyst at JS Research.

Car sales were improving and one of the reasons was that auto finance along with restoring economic confidence had reduced interest rates and seasonal effects, he added.

Auto finance was at its peak during 2006-2007 and its share in car sales was 70 per cent to 75per cent, however in the later years it was almost stooped due to higher interest rates, and most importantly, auto finance default rate was very high and recovery rate was very low which forced banks to do critical review of their auto finance product, he said.

After this some of the banks completely stopped auto financing and some opted very stringent policy, entertaining their reliable customers only. At present its share in the sales is 30 per cent.

The current market scenario of consumer car financing shows that only few of the banks are doing car financing and some of the key players are Meezan Bank, Dubai Islamic, Faysal Bank, MCB Bank, HBL and Bank Alfalah. On the other hand, Citibank, UBL Ameen and Standard Chartered Bank and leasing companies had completely stopped this product, said a market source.

At present, interest rates at which banks are extending auto finance ranges between 17 and 22per cent. Initially, minimum equity was 30 per cent but banks have reduced it to 20 per cent to attract more customers.

A market player said that though auto finance was slowly reviving and car sales were improving, there were other factors which would continue to be a hurdle such as mark-up rates which were still high despite the fact that discount rate had reduced by 250 basis points during the last one year. Another reason is the continued price increase of automobiles and increasing non-performing loans (NPLS).

The consumer finance market will remain stagnant unless and until the interest rate is not reduced. A banker said that to minimise the risk of defaulters banks had adopted a more cautious stance and they had restricted the idea of “NO DOCs (no documents).” Initially, when auto finance started it was easy to avail of auto finance product by providing the least number of documents. The “No Docs” policy costs banks heavily.

But at present complete evaluation and proper assessment of customers’ ability to repay is considered before a loan is sanctioned. It is mandatory to provide bank statements, pay slips, CNIC, references and the most important is the Credit Information Bureau Report which consists of the borrowers all previous loans’ details and capacity to repay.

Not only are banks cautious, insurance companies have also made it mandatory for customers to avail of car tracking system at the time of auto financing from banks to curtail their theft losses.

According to the data released by the Pakistan Automotive Manufacturers Association (PAMA), local car sales grew by 42 per cent in eight months FY10 at 68,307 units against 47,982 units in same period of last year. Volumetric sales of all assemblers are recovering from a pit of last year and continues to post double-digit growth.