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Splendid auto financing under trying economic times

Since key policy rate is at 7 percent for the next two months with the hope that the discount rate would remain in single digits for at least a year or two to spur the economic growth, auto financing seems to capitalize on it. Banks are working at full throttle to lure customers for auto financing which is reminiscent of halcyon days of auto sector. In fact this is an opportunity for the auto sector to recoup the losses incurred in the first half of the preceding calendar year by virtue of lockdown and outbreak, which stifled the auto sector to the hilt. There is no denying the fact that the appreciation of dollar and the spike in the discount rate result in the deceleration of the share of financing for auto sales. There are instances in the not-too-distant past when there was double digit deceleration in the auto financing in the wake of higher interest rates. So the situation at this juncture with low interest rates is rather tremendous for the auto sector and for the financial institutions as well.

Undergoing a drop of up to 72% in automobile sales in the wake of lockdown, there were jitters across the auto sector because of non-production days at many assembling units, plant shutdowns, unsold inventories and employee furloughs etc. There was uncertainty with dismal anticipation for the second half of the preceding calendar year. However, the situation turned up in an entirely contrary way leading to record orders and getting back to normality in no time.

Here are the grievances of the customers who want to avail auto financing, however, they have to pay exorbitant amount even when the discount rate is at 7%. It grieves the customers that the government is indifferent to multiple price increases by car and bike assemblers. Numerous reasons are quoted right from the depreciation of the local currency to the spike in taxes by the government. If the auto industry is swamped with taxes such as the federal excise duty ranging from 2.5 to 7.5 percent and additional customs duty on raw material imports etc., the same would be passed on to the customer who is the actual victim. There is simple economic rule, which the relevant authorities need to comprehend is ‘the more the sales, the more the production leading to whopping generation of taxes for the coffers of the government’.

Looking at the ramification of the auto financing during these turbulent economic times, one could gauge that auto financing might backfire as well as it transpired during the 2008 financial crisis. It is for sure that auto financing for commercial vehicles by and large leads to economic activities vis-à-vis the passenger vehicles, which curtail the purchasing power of even those who could afford and remain solvent.

There are some instances in the past when delinquency ratio of 5 to 10 percent on auto-leasing prompted the banks to employ goons in the recovery operations to settle with their defaulting customers. And it was assumed that these third party contractual goons belonged to some political parties etc. There were plenty of instances of altercations, use of abusive language, humiliation in front of the family members and neighbors etc. It is hoped such incidents would not be repeated since in some instances people committed suicides as well to rid of the conundrums.

It was during the lockdown and economic turndown during the preceding calendar year, when people with leased vehicles were unable to pay their installments. It was through the intervention of the central bank that some relief was offered to the sufferers who were asked to pay eventually even when the economy underwent recession with the negative growth of 0.4 percent.

Economic growth is anticipated at 2.5 percent during the current fiscal year and almost all economic indicators are encouraging at the moment in Pakistan contrary to lockdowns, fear, uncertainty, and overwhelming number of patients in the hospitals in many parts of the world. It is blessing of the Almighty on our country. In the given situation when the exports are on the rise and ample orders have been received by the manufacturers of textiles, cement, automobiles etc., it is hoped that there would be plenty of employment opportunities for those who are unemployed and underemployed.

It is not only in Pakistan but also the Global ‘Automotive Finance Market’ is likely to grow in the coming years with impetus from strategic collaborations among companies from across the world. The global market is likely to expand in the coming years, driven by increasing demand for electric cars and adoption of e-commerce business platforms.

Since the economy of Pakistan is surely integrated with the world economy, the impact of the world on auto market would also be on the Pakistani auto market and there is a likelihood of an increase in auto financing in the next couple of years, to be precise.

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