Car financing by banks in FY 2020-21 reached an all-time high of Rs. 297.5 billion as Pakistani consumers enjoyed the auto financing facility at a comparatively low interest rate despite the COVID-19 pandemic-related financial risks.
The driving force behind the record-breaking auto financing was the introduction of new models and brands by new entrants in the domestic auto market.
According to a report by the State Bank of Pakistan (SBP), auto financing by banks increased by Rs. 86.5 billion or 41% between July and May of FY 2020-21 to Rs. 279.5 billion in May 2021 compared to Rs. 211.11 billion at the end of FY 2019-20.
The auto financing activity in the country peaked during Q2 FY 2020-21 as a stable rupee-dollar exchange rate supported growth in the automobile sector since the majority of the car parts are imported in Pakistan.
Cars of 1,000cc engine or above and SUVs were the major contributor to the increased auto financing in Q2 FY 2020-21.
Multiple factors, including a decrease in interest rates, a stable exchange rate, and an increase in competition due to new entrants, had a positive impact on the auto financing by banks in the country.
Similar growth in auto financing was last witnessed during President Musharraf’s tenure when banks offered car financing without verifying the borrowers’ capacity of repaying them. However, a huge number of borrowers defaulted on paying off the car financing which raised a lot of questions over the banks’ decision.