State Bank of Pakistan has revised Prudential Regulations (PRs) for Consumer Financing. According to the statement released by the SBP on 23rd September, this will help to moderate demand growth in the economy, leading to slower import growth and thus supporting the balance of payments.
This revision in PRs are meant to cater to curtail the increased consumer financing in the economy, especially “prohibit financing for imported vehicles, and tighten regulatory requirements for financing of domestically manufactured/ assembled vehicles of more than 1000 cc engine capacity.”
However, it is worth mentioning that the impact of this policy would also be on other types of financing such as personal loans and credit cards.
New regulations
The following changes have been implemented in this regard.
The maximum tenure of auto finance has been reduced from seven to five years; Maximum tenure of personal loan has been reduced from five to four years; Maximum debt-burden ratio, allowed to a borrower, has been decreased from 50 to 40 percent.
Moreover, the 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, and the Minimum down payment for auto financing has been increased from 15 percent to 30 percent.
According to the statement released by the SBP, in order to protect the lower and middle-income car purchasers, these policies are not being applied to the locally manufactured/assembled vehicles with 1,000cc or lower engine capacity.
Similarly, in order to keep its commitment to the preservation of the environment, the locally manufactured electric vehicles are also going to be regulated by status quo regulations.
“Further, in order to encourage Roshan Digital Accounts and facilitate overseas Pakistan who have opened these accounts, regulatory instructions for Roshan Apni Car product of the banks or DFIs have also not been changed,” SBP’s statement read.
Read More: SBP decides to raise the key interest rate
Analysts have had some reservations about the PRs.
Reaction by analysts
Chief Risk OfficerKarandaaz Pakistan Ammar Habib Khan took to Twitter to say that Central Bank is getting into full ‘fool in the shower’ mode with the new consumer prudential regulations.
Central Bank getting into full fool in the shower mode with the new consumer Prudential regulations.
— Ammar Khan (@rogueonomist) September 23, 2021
To put some context into this, ‘fool in the shower’ was a phracse used by famous Nobel Laureate Milton Friedman, depicting a scenario where the central bank, SBP in our case, acts too fast to stimulate/slow down an economy. Friedman argued that any change, such as ‘increasing policy rate’ as SBP did recently, takes some time to show an impact on the economy, thus economists today are cautious about overreaching to implement policy change.
Thus, Khan argued that the debt-burden ratio has been set at 50pc for the longest time, and reducing that would be an excessive burden on borrowers, maybe even rendering them non-compliant in their economy, thus in the long run this step would prove to be detrimental.
Similarly, another prominent economics and finance blog by the name of SBP Watch mentioned, “The share of car financing is 2% in the scheduled banks’ credit portfolio. It presents no systemic risk such that a revision in Prudential Regulations is required.”
The blog mentioned that the Central Bank should allow some room for the commercial banks to carry out their own credit risk management, which it mentions there is no scarcity of in the commercial banking sector.
The blog reads, “It appears SBP doesn’t trust the bank’s management and systems to be capable of managing a car financing portfolio.”
The blog mentions a recent paper written by Pakistan’s renowned policy think tank Tabadlab, which analyses the recent guidelines by the SBP to promote the financing of housing units in under-construction projects.
The paper titled, “Central Bank as Real Estate Regulator: Can the SBP’s Latest Guidelines Help Meet the Housing Shortfall?”, argues that the announced guidelines are mainly for the benefit of the high-rise construction projects.
The paper’s analysis is similar to the blog, that SBP should not be micromanaging the projects, and rather trust the commercial banks’ experts to do it for themselves.
Another argument pointed out in the article is that SBP should not try to sustitute for Real Estate Regulatory Authority (RERA), as it is RERA’s mandate to ensure accountability in the real estate sector, and RERA is the authority responsible for safeguarding the rights of stakeholders.
MD KASB Securities A A H Soomro shed some positive light on the actions. He said, “With these steps (PRS and schedule sharing of imports), policy makers have taken a pro-active approach to moderate demand, taper the import growth & bring investor confidence back over next 2-3 months. However, more would be needed.”
That said, the car assemblers would also feel not threatened by imports nowadays. This must not deter introduction of new cars, safety measures & competition to improve quality at an affordable rate.
— A A H Soomro (@AAHSoomro) September 24, 2021
However, the question still remains as to why this was needed, because as SBP Watch said, car financing makes up for only 2 per cent of commercial banks’ portfolio, and the SBP doesn’t need to protect commercial banks because they are more than capable of analysing their risks.