AUTO FINANCING AND ISSUES AHEAD
TARIQ AHMED SAEEDI
Nov 15 - 21, 2010
Driven by the positive sales figures from the auto sector, banks and financial institutions are likely to give a boost to auto financing that has been sagged due to slowdown in auto sales and production as well as deteriorating asset base of financial institutions spurred by high interest rate. Auto experts say the sector has depicted a robust performance during first four months (July-Oct) of current fiscal year and expects this trend will persist despite negative implications of floods and depreciation of Pak rupee against dollar and yen.
A 10 percent year on year growth is significant given the present circumstances marked by uncertainties on many fronts, according to analysts keeping close eyes on developments and their impacts on automobile sector. While four-month period is not indicative of trends in future, yet it can leave traces of what positive at least could be in store for the players in the sector. Basing arguments on such assumptions highlight the prospective good performance of auto sector in months to come.
During 2001-2007, auto sector grew 270 percent, according to a report on automobile sector of Pakistan. However, later the auto sector underwent a major correction to mow down top and bottom lines of key industry players. Sceptics fear recurrence of dreary outlook of automobile sector in 2008-09 when almost 50 percent reduction in sales and production made the stakeholders in the sector to get close to collapse. A massive layoff was expected all the way to bring down 190,000 workforce of auto sector to half. Cut in production from 164,710 to 84,308 and in sales from 164,650 to 82,844 in brief buffer of one year was shocking to not just assemblers but also vending industry, which is an important component of both horizontal and vertical production chains. However, in 2009-10 the figure started to inch up and rebounded at 121,647 (production) and 123,957 (sales).
Recent 17 percent jump in sales of passenger cars in October substantiated the hopes of growth supported by revival of buying. Especially, small car segments are likely to have priority in auto financing because of its high demands in local market. But, there is still a major threat of customers alienated by high interest rate and exorbitant prices.
State bank of Pakistan is keeping the interest rate high to control inflation. Customers availing auto-financing facility of bank have to pay interest rate, which is highest in the region and prolongs debt maturity tenure. This long period leads to defaults on loan payments by even genuine borrowers. High interest regime has impinged on growth of private sector as evident from the dampened industrial outlook caused by crunch in liquidity from financial institutions that for long time remained risk aversive to expand asset base through consumer financing. Consumer financing continues to decline in the first quarter of present fiscal year. Total outstanding position of commercial banks in relation to auto loans at the end of September 2010 was 61 billion rupees.
Auto financing in Pakistan despite having seen healthy progress in ongoing decade has to have supports of efficient financial models that can minimise the chances of deliberate delinquencies. It is a universal fact that no bank can predict future happenings 100 percent and subsequently is unable to design risk free portfolios. For example, meticulously innovated financial product in US could not avert the sub-prime loans' defaults. Similarly, when economic crisis emerged unexpectedly in the conservative Pakistan's economy a snowball reactions reflected in bad debts stemming from different core sectors in the country. In spite of this, what can be nipped in the bud is predetermined deterioration of assets, for which stringent scrutiny is instrumental. Analysts say there is a lesson in the episode of US subprime loan for all banks eyeing to grab leading shares in consumer financing in Pakistan. Understandably, concessionary loans or financing with overlooking repayment ability of borrowers have high probability to create bad debts.
Auto financing has stimulated growth in automobile sector in recent past. It led to the rise in automobile production and as a result, local vending industry expands. The benefits of expansion are not limited within the auto sector but spread to other sectors like insurance sector, which witnessed significant growth in its premiums underwritten from non-life insurance segment in last few years.
TIGHTLY CONFINED TO PASSENGER CARS
Notably, auto financing in Pakistan is tightly confined to passenger cars while public transport financing has not been perceptible over the years. Since public transportation is one of the sectors that are closely associated with the masses, funding by financial institutions can be instrumental in improving state of dismal affairs of public transportation sector. Consortium funding is a suitable means given the huge capital requirements of public transport sector. Though financial institutions do not hold good memories of funding transport projects, yet they can utilise past experiences to prevent recurrence of similar issues.
The unethical practices of loan recovery by banks came under severe criticisms of people and following societal pressures, such practices are not commonly heard nowadays. Financial institutions have numbers of experts engaged in designing and marketing of products. They should harness in-house talents to minimise instances of post-loan hassles: for financial institutions (provisioning) and for clients (disappointments). Provisioning eats into profitability that may have used for financial innovation or designing of tailor-made products. State bank's former governor used to insist on banks and financial institutions to come up with products compatible with the socioeconomic characteristics of Pakistan. There is a need for banks to revisit strategies they have devised for financial inclusion especially to expand outreach of financing.