Brazil auto sales likely will stay flat this year as the country's banks pull back on vehicle financing, auto importer Sergio Habib said.

Habib, whose importer SHC is helping finance the construction of a factory for China's Jianghuai Automobile Co (JAC) in Brazil, told Dow Jones banks have been reducing the maturity of auto loans, hurting sales. Despite the drop in the benchmark interest rate, which Brazil's central bank has been slashing since August and stands at 9.75%, the length of the financing matters more to Brazilian consumers, Habib said.

"This year the market won't grow," he said during an industry presentation in Sao Paulo. "What [expands] the market aren't lower rates, but longer terms and banks nowadays aren't approving loans of 60 months any more."

For Luis Curi, chief executive of the Brazilian unit of rival Chery, the tighter auto credit market is in great part a result of rising default rates. Anef, the association of automaker financing institutions, said last week default rates climbed to 5.5% in February, the highest in at least three years. Total credit for auto purchases expanded 6.6%, slowing from 2011 growth of 7.9%.

Anef expects the default rate to decline, and industry analysts have said the rate should drop by the end of this year to historic levels of close to 3%.

Curi told Dow JOnes he expects auto credit to recover in coming months as salaries improve and the economy resumes growth which should help sales in the second half of this year.

Habib and Curi, who are helping build local factories for the Chinese automakers, also praised the new rules for the automotive industry announced by the government last week, if only because they were better than the first change in industry rules announced last year. Brazil raised the so-called IPI tax on autos by 30% at the end of last year but exempted cars with at least 65% locally produced content. Last week it defined rules that will be in place from 2013 to 2017.

But last year's tax boost didn't specify how newly established carmakers would get around the tax and Habib and Curi said last year's rule change could discourage investment since it is almost impossible to start production with those levels of local content. Therefore, the newcomers would have to pay the tax even though they were producing locally.

"It's not the best thing in the world, but it's better than what it was," Chery's Curi told Dow Jones.

The new rules have spurred Chery to pick up the pace of investment and Curi said output will begin in 2013, from a previous forecast of 2014. That is because carmakers will be able to reduce their tax burden as soon as they start producing.

With the production date moved up, Chery likely will move up the date of building an engine and transmission factory in Brazil, Curi said. Curi expects Chery to have about 1% of market share by 2015.

For JAC, however, the change in rules caused a bit of a delay in construction plans. JAC's original plan was to get its factory operational by 2013 but that was roiled by the announcement of the new rules. Habib told Dow Jones JAC should be operational by 2014 and should have about 2% of market share by the following year.

Asked about the new rules, he declined to say whether they were favourable or not, noting the auto industry is slow to adapt and what is needed above all are rules that last rather than changing with each government.