AUTO INDUSTRY BOOMS AS AUTO FINANCING DWINDLES

SAAD ANWAR HASHMI
(feedback@pgeconomist.com)

Sep 24 - 30, 20
12

The automobile industry is one of the most exciting segment of the economy involving thoughtful decision making and expensive purchase for cars readily available in the market. The industry comprises of three major players including Pak Suzuki, Honda and Toyota when it comes to domestically assembled cars and constitute to a major share when it comes to consumer purchase. Consumers in recent times have witnessed an increase in the price of locally assembled cars primarily due to devaluation in exchange, duty structure and cost of manufacturing making them expensive as prices and being revised up year on year. Considering that furl prices are on a rise and interest rates are at steep levels, consumers find a new purchase decision tough and heavy on the pockets.

High price of local assembled cars has opened up a new avenue for imported vehicles, mainly reconditioned, used, or pre-owned cars available domestically at a competitive prices in direct competition with local assembles. Automobile dealers and imports are more than eager to import new vehicles to give consumers a wider choice and provide vehicles are an affordable cost for which the market is booming. It is expected that imported cars with constitute to 50 percent of the domestic demand by FY13. Looking at the latest figures, Automobile manufacturers sold 157,325 locally assembled cars in FY12 compared to 127,944 cars in FY11 including those classified under 800cc and above. Cars are primarily being imported from Japan upto 5 years old whereas luxury cars including but not limited to Audi, Lexus, Mercedes and BMW's are being imported from United Kingdom. The rise in domestic fuel prices have encouraged imports of smaller vehicles which fall in the category of 1,000cc or below. It is expected that local assemblers will manufacture 200,000 cars by FY13 whereas 70,000 or more cars will be imported during the same period to meet domestic demand.

With the increase in cost of living and inflation, people are not willing to tie themselves in a debt burden through payment of car installments considering the interest rates. The lowering of the discount rate by 150bps may be beneficial for new consumers interms of the interest rate, however, it is too early to analyze with conclusive evidence whether reduction in interest rate will increase auto financing. Consumers more than willing to purchase a vehicle blame banks not only for interest rate charged and the spread over the benchmark lending rate but also tougher qualifying criteria for an auto loan disqualifying many. Based on the latest figures released by SBP, automobile advances were PKR 45.722 Billion in March 2012 as compared to PKR 53.670 billion as on March 2011 which shows that consumers are deterred through high price of vehicles being sold in the market coupled with high interest rates. Banks are also increasingly cautious with the lending whereas the infection ratio against auto advances was 10.5 percent as on March 2012.

If we further analyze the industry structure and reasons why auto financing has decreased despite booming industry, viewpoints vary from the manufactures point of view and the consumer's point of view. From the banks perspective, most banks are servicing their current consumer banking portfolio and are not seeking new relationships with a higher than average infection ratio and slow recovery process. Residual funds are placed through Treasury Bills making banks complacent with investment in risk free assets rather than auto financing or consumer banking on the whole. The bank management is more cautious with new exposures and have created a tougher qualifying criteria for new financing increasing the income benchmark. Other factors taken into account by the bank include stricter analysis over cash flows, past credit history, type and cost of vehicle, residence and nature of job to name a few. Income being the key, it is safe to assume that those who would have qualified for an auto loan few years back with the same credentials may be rejected today. From consumers perspective, bank financing has been on a decline since consumers, to avoid interest expense have used their own savings to purchase cars rather than bank borrowing. Consumers too blame banks for taking longer time to scrutinize the loan application and rejection of applications who otherwise would qualify for a loan through another bank if one steps back.

The tussle between allowing import of cars has been on the table for long. The automobile import policy is revised frequently and it is still uncertain whether or not the import policy will be conducive for new imports. Domestic manufacturers want the imports to stop on the premise that investments have been made domestically with hope that the industry will boom where imported vehicles become a threat to sustainable growth. The automotive dealers are pushing the government to allow import of cars upto 10 years old which would open up a wider market and will further allow car imports at a much lower price than currently available.

Analyzing the past lending practices for consumer banking, the lending has declined since the recessionary impact witnessed in 2008 and not shown signs of recovery based on latest figures highlighted. Banks continue to maintain a hold policy and try to churn as much revenue from the current portfolio rather than increasing the portfolio size. During the current year, the outstanding stock level of government securities reached Rs. 1,662 billion by August 2012. The year-on-year growth in the private sector credit was only 4.2 percent. The only way auto financing may strengthen with the decline in interest rates is if banks push consumer banking, particular auto financing through marketing and sales efforts through disbursement targets for the management.

The auto industry is expected to show signs of growth with launch of new models and import of various different brands giving consumer a wider playing field. Regardless the decision by the authorities, imported vehicles will continue to be sold in the market. Since the domestic price is on a rise for local assembled cars, imported vehicles continue to be an attractive purchase option. The challenge is for the banks to disburse loans for financing of these vehicles in line with industry growth.