AUTO FINANCING CAN REVITALIZE MOMENTUM
SHABBIR H. KAZMI
Sep 14 - 20, 2009
During 2000-05, automotive industry in Pakistan thrived mainly on auto financing. With the hike in interest rates not only number of potential customers acquiring vehicles on deferred payment reduced but rise in delinquency also forced the financial institutions to follow stringent credit appraisal procedure. On one hand repossessing vehicles in unethical ways created uproar but disposal of these units also created corruption within the financial institutions.
The consumer finance attracted intense criticism because many critics termed it extravaganza. They said that buying things on deferred payment was unsustainable and sooner or latter financial institutions would face default. Their criticism proved partly true because of rise in delinquency. It must be kept in mind that the high interest rate became a thorn because of reducing purchasing power. However, the default rate was still very low in Pakistan as compared to other countries in the region. If it was too high in the US, even the countries having petrodollars are also bearing the brunt of global economic meltdown and Pakistan cannot be an exception.
It is on record that for decades there was no auto finance facility in the country and people were forced to buy vehicles on full cash payment. In an attempt to facilitate people import of second hand vehicles was allowed under various schemes. It was only in nineties that vehicles were offered on easy installments under 'Prime Minister's Public Transport Scheme'. However, involvement of banks operating in the public sector, influence of political parties, and blatant violation of credit appraisal procedure turned this scheme into a nightmare. The black hole was so big that since then no other financing scheme has been launched.
Having said that, it is necessary to recognize the role played by the leasing companies. During nineties interest rate was hovering above 20% per annum despite that credit was not available, though the leasing companies were charging higher interest rate to cover the cost of funds borrowed by them and extended to the clients. The positive point was that acquiring assets under lease was much easier and less time consuming. Entrepreneurs were willing to pay the premium for the prompt processing of papers and disbursement of funds.
As the concept of leasing became popular commercial banks having access to low cost funds also ventured into leasing business. However, bulk of the business did not fall in the category of leasing but financing. In leasing, the asset being leased is the collateral but banks continued to ask for other collaterals. However, with the passage of time, the concept of 'operating lease' became popular but banks continue to provide 'financial lease'. It is irony that even the regulators do not fully understand the concept of financing and leasing. Despite that, people continue to acquire vehicles under the disguise of leasing.
Be it a passenger car or a commercial vehicle the prices have become prohibitively high and acquiring at 100% cash payment is just not possible. Therefore, there is a need to offer auto finance/lease facility despite all the criticism. It is also necessary to develop a system whereby interest of financial institutions as well as the borrowers can be protected.
Two of the areas in need of specific attention are credit appraisal and documentation. Both these areas were either grossly ignored or blatantly violated in the past. This led to higher delinquency and heavy provisioning forcing the financial institution to keep their spreads exceptional high.
It is necessary to highlight the importance of insurance in auto financing. Since vehicles are exposed to a variety of hazards, risk mitigation is necessary. The 'Yellow Cab' fiasco was mainly because the vehicles were not insured properly and adequately. In case of any accident and not payment of claims by the insurance company borrowers lost the asset and repayment was just not possible.
The local companies must benefit from the world leading leasing company, Orix of Japan operating in Pakistan. It should also be decided that whether the financial institutions will provide auto finance or under write lease because that would determine the need for the collateral. The collateral always backs financing and in case of lease, the asset itself is the collateral.
The central bank should ask financial institutions to utilize quarter of a percent of their deposit for auto finance. For better mitigation of risk, financial institutions should also join hands with automotive assemblers and insurance companies. Simply refusing auto fiancÚ facility is an absurd decision. Pakistanis certainly deserve to travel in better vehicles, both private and public.