Banks to slow import, will no longer offer loan for imported cars

The decision to stop giving out loans for imported vehicles was taken by the State Bank of Pakistan. It is an effort to stop the already high trade and current deficits.

Imported cars being transported in Pakistan
Imported cars being transported in Pakistan

The State Bank of Pakistan(SBP) recently released its revised prudential regulations (PRS) for consumer financing. The revised regulations alongside other changes included the reduction of loans for imported vehicles. SBP took this step inorder to maintain the the ballooning trade deficits and stop import growth in the country.

SBP in the revised regulations have made some notable changes regarding loans for imported vehicles. Changes includes reduction in financing limit moreover a reduction in time limit for the loan. After releasing the revised regulations on Thursday, the SBP gave out a statement regarding their decision. The SBP in the statement said that “This targeted step will help moderate demand growth in the economy, leading to slower import growth and thus supporting the balance-of-payments”.

Pakistan’s Balance of Payment problem

Pakistan since the past year has been experiencing a decreasingly negative balance of payment(BOP), the reason? a burgeoning trade deficit. In August 2021, the trade deficit surpassed $1.5 billion which surely is bad. The reason behind such a high trade deficit is the highly increasing import growth in the country. Analyst indicate that if imports keep on growing at the same rate, the trade deficit will most likely experience another high.

This high trade deficit surely justifies SBP’s decision to reduce imports. “The changes in the prudential regulations effectively prohibit financing for imported vehicles, and tighten regulatory requirements for financing of domestically manufactured or assembled vehicles of more than 1,000cc engine capacity and other consumer finance facilities like personal loans and credit cards” said the SBP regarding its decision.

New decision regarding loans for imported vehicles

  • Maximum tenure of personal loan reduced from five years to four years
  • Tenure of auto finance reduced from seven to five years
  • Debt-burden ratio, allowed to a borrower, decreased from 50 to 40 percent
  • Overall auto financing limits availed by one person from all banks/DFIs, in aggregate, will not exceed Rs3,000,000, at any point in time
  • Minimum down payment for auto financing increased from 15 percent to 30 per cent

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