Iranian auto industry has been struggling for six months and has been facing serious challenges by decrease in demand. From March of 2015, IKCOs production has been declined 2.5% and total production has reached 273,000 units of the passenger cars. Also, Saipa had the same situation as passenger car production has been declined by 11.5% and the total output has reached to 180,000 units from March of 2015 till the month ending October 22. Moreover, because of firms overwhelming inventories about 125,000 cars, firms fix costs have driven over rate.

Automaker companies previously, in order to sale their products, used to deliver loans around 150 million Rials to customers with Interest Rate of 21% for 3 years and 40% of cars price was paid in cash by consumers and 60% was given by loan. In order to increase demand in auto industry and sale inventory products, there were two solutions to solve auto makers financial problems (especially IKCO and Saipa);

  1. Reducing auto productions price (that causes disadvantages for companies)
  2. Giving loans to consumers by financial resources of Central Bank of Iran.

According to anti-recession policy by government which is preventing car makers from increasing the price of their products, in the long run the injection of the money will hurt the industry rather than solve their cash flow problem. One of the solutions is utilizing financial resources as a loan which is given by CBI to domestic banks. So, in this way, banks can buy cars and settlement those with car maker factories and loans will be available for customers. This process will resolve the cash deficiency issue of automotive sector.

In order to trigger demand in this sector, Central Bank of Iran, provided new condition for loans given to customers for 6 months (started at November,9th) which has 16% interest rate for 4 years, also 20% of car price has to pay by cash and up to 80% is by loan. This loan based on anti-recession policy by government in order to increase demand in consumption.

The auto loan ceiling has been set at 250 million Rials or 7,120 $ (each dollar equal to 35,000 IRR) for cars which are less than 500 million Rials with an interest rate of 16%. This rate is just 1-3% more than inflation rate. The payback period has reportedly been reduced from a maximum seven years repayment period which has shortened to four years. The Central Bank of Iran will be providing the loans to banks, which will have to repay the amount with a 14% interest rate.

CBI provided financial resources to domestic banks and banks support firms overwhelmed inventory productions. So two biggest automakers in Iran could recognize their revenue by this year and cover their shortage of financial resources. On the other hand, financial resources which is given to banks with 14% interest rate, so banks could recognize revenue by 2% of all contracts and by this bank could be able to improve their situation as well.

As contracts start on November,9th after 6 days, 110,000 cars has been sold, which about 58,000 automotive were sold by IKCO and 52,000 by Saipa. According to IKCO and Saipa inventory, there were about 125,000 automotive have been unsold in factories warehouse. This policy of loans could trigger demand, because consumers prefer to buy their car from automaker instead of leasing companies.

Moreover, by motivating consumers demand, according to anti-recession policy, inflation rate may grow and this is against CBI policy. Therefore, government should consider this threat as well.