Enabling the middle class to own a new car

July 18 - 24, 2005

Over the last three years car sales have been driven by the auto financing. According to the sector analysts nearly 65 percent cars are sold under auto finance scheme being offered by commercial banks, leasing companies and Modarabas. The common perception was that in the rising interest rates scenario auto financing may decline but the initial results are contrary. The pleasant surprise was that car sales in June were almost double the average monthly sales.

It is on record that since 2000-01 car sales have gone up by more than three folds. Car sales, which were 38,047 in financial year 2000-01, exceeded 127,000 in 2004-05. The largest percentage of this belonged to cars up to 1,000cc. These include Hyundai, Suzuki and Daihatsu, with Suzuki Mehran enjoying bulk of the market share.

One may wonder why the sales of up to 1,000cc cars are so high. The experts say, "With the rising cost of fuel people are gradually shifting to smaller cars. Besides, in a number of households the smaller car is also an alternate/second car. On top of every thing bulk of the buyers of smaller cars (utilizing financing facility) are those who are switching over from second hand cars to new cars. Purchase of new car keeps one away from mechanics for at least two to three years, if being driven properly."

Saying that sales are driven by auto financing, it is important to note that the facility is mostly utilized by the buyers of up to 1,000cc cars. The second largest group is corporate sector, which utilizes the facility for providing cars to its middle management. Auto financing of above 1,300cc cars is rather uncommon, mainly because such buyers have ample money supply.

Another important segment taking advantage of auto financing is public transport operators. They utilize the facility for the financing of buses, light commercial vehicles and even radio cabs. It may not be wrong to say that quality of public transport has improved considerably in the recent past, due to availability of auto financing facility. However, there is still room for a lot of improvement. Both the urban and rural areas suffer from acute shortage of quality public transport. This factor is also responsible for the rising sales of two wheelers and smaller cars.

There was a general perception that car sales will decline with the rising interest rates. However, June sales completely negate this perception. One may wonder about the market behavior. However, analysts are not surprised. They say, "There is certainly a rise in interest rates but the impact on monthly installments is only marginal. Any one who is willing to pay monthly installment of around Rs 10,000 seems less concerned about the marginal increase. However, it is also true that now buyers prefer factory fitted CNG cars. This is more like a trade off, paying marginally higher monthly installment and saving in daily fuel cost."

One of the reasons for opting CNG fitted cars is that these also have airconditioners. In cities like Karachi airconditioner is no longer considered a luxury, it has become a necessity. In the highly polluted environment and worst traffic jams an airconditioned car can keep one's head cool. As stated earlier use of CNG also keeps fuel cost low. However, the price of CNG is also on the rise but still it is much lower compared to petrol.

Recently there was a news that people acquiring cars were facing problems in making timely payment of monthly rentals. It was stated that as many as 13,000 may come back to the leasing companies. However, large scale defaults have not been witnessed as yet. Financial sector experts say, "We may not see defaults of such a magnitude. The cars acquired by people, with limited earnings, have become symbol of their financial status. Therefore, they may cheat or borrow but cannot afford to see their names in the defaultersí list."

Auto financing can be divided into three distinct categories, financial lease, operating lease and auto loans. Financial lease is most common but the option is mostly exercised for owning a private car. Operating lease, though uncommon till a couple of years back, has gained a significant market share. However, this option is usually exercised by the operators of public transport. Auto loans are nothing but financing backed by a collateral, usually the car itself.

Auto financing market is expected to remain robust in the days to come, despite any increase in interest rates. Many analysts are of the view that the country will not witness those rates, which were the mark of nineties. Some of them are also of the view that any significant rise in the interest rates may not be there at all. This belief is based on the growing liquidity available with the financial institutions.

Availing auto finance facility also enables people, those with adequate money, to divert their funds to other revenue generating options. People with regular income avail the facility mainly to improve quality of their life style and are also particular about the timely payment.

However, an area needing greater attention of auto financing companies is public transport. Urban areas still suffer from acute shortage of quality public transport. Some analysts are of the view that improvement in public transport system can help in achieving the twin objectives - pollution control and overcoming traffic jams.