Tashkent, Uzbekistan (UzDaily.com) -- Uzbek lenders’ first quarter car loan originations fell 44% year to year to 4.2 trillion soums, according to the date of Central Bank of Uzbekistan (CBU). 

Moody’s Rating noted that a more moderate pace of loan growth reflects banks tighter underwriting standards and fewer consumers taking on debt that they might struggle to repay, which benefits Uzbek lenders asset quality. 

Car loan originations began slowing after very rapid growth over the past two years following the CBU’s implementation of a 25% cap on the share of car loans in total loans for each bank in the third quarter of last year. The regulator also increased risk weights for car loans with high LTV ratios. In addition the CBU will implement a maximum payment to income ratio of 60% for all loans in July this year and will tighten the cap to 50% beginning in 2025.

In 2022-23, Uzbekistan lenders’ car loans increased threefold to around 9.5% of total loans at the end of March 2024, up from 4% at the end of 2021 (Exhibit 2). At the same time, new car prices rose dramatically because of supply chain and shipping disruptions. In addition, local currency depreciation made it costlier for consumers to purchase foreign-made cars and increased manufacturing costs for local automakers, which heavily depend on imported parts. As a result, car loan payments as a proportion of disposable income also increased materially, the agency said.

Moody’s Rating underlined that higher prices of used cars will continue to support the performance of auto loans issued before 2023 and recovery rates for them, but newer loans are riskier because larger loan amounts will make it more burdensome for borrowers to repay their debt. 

The average debt-servicing payment to income ratio for car loans increased to 69% at the end of June 2023 from 56% in June 2022, according to the CBU. The average loan-to-value (LTV) ratio for car loans in Uzbekistan increased to more than 81% in 2023 because of decreased down payments, according to the CBU. The higher debt-servicing payment to income ratio and higher LTVs for car loans increased borrowers’ risk of defaults and could lead to lower recovery rates in the event car prices drop. 

Moody’s Rating believes the regulator’s measures to cool car loan growth and limit borrowers’ debt burdens as a proportion of their income are critical mitigants for banks’ longer-term asset risks and will help limit the extent of a deterioration in asset quality in Uzbekistan. 

For now, delinquency rates for car loans in Uzbekistan remain very low, while recovery rates for them remain high, helped by strong vehicle demand that supports prices in the secondary market.