High loan rates drive away new car buyers

IN THE last few weeks, interest rates on new car loans have scaled prohibitively high levels of 17%, last seen around 2001-02. These rates have had their impact on customer demand and car sales. “The demand has been affected in a big way. We see prospective customers walk out of showrooms without completing the sale and even those who choose to buy, decline loans from private banks and depend on loans from PSU banks or friends and family. The ratio of cash-down purchases has gone up substantially in the last two months,” said a leading car dealer in Mumbai. ICICI Bank, HDFC Bank, SBI and its associates and Kotak Mahindra are the biggest financers in the market. In the past few months, interest rate across retail segments have seen a sharp rise. Interest rates for new car loans for one year has now reached levels of 17%, for 24 months at 16% and 36 months at 15%. The net interest rate for the customer in some cases would be lower by 3-4.5% depending on manufacturer and dealer discounts (subventions).

Six rate revisions in car loans in 1 year

INTEREST rates on new car loans have scaled prohibitively high levels of 17% in the last few weeks. However, the net interest rate for the customer in some cases would be lower by 3-4.5%. This is, however, dependent on manufacturer, models and also the stock which the dealer has in the showroom. “The finance subvention on some models is as high as 4.5% and this brings down effective interest rate on the loan for customer in these models to 12.5%. Subventions normally are at around 3%,” said a dealer. This calendar year, there have already been three revisions. Interest rates for the one-year period at the beginning of the fiscal was at around 13.5%, while that for three-year and above periods were at around 11.75 to 12.5%. Incidentally, around 3 to 4 days ago, ICICI Bank cut its rate by around 50 basis point to perk up year-end demand. “Customers are hesitant to take a buying decision on a new car loan, when they realise that interest rates now are far more higher than a few months before. There have been six rate revisions in the past one year,” points Ashok Khanna of HDFC Bank. The first 20 days of the month have already seen a fall in demand. Says Sumit Bali, CEO, Kotak Mahindra Prime, “Demand in the first 20 days of March have been affected by 20-25%. This demand is much lower than expected. However, this is nothing too unusual. The demand in March normally picks up towards the end of the month as corporates and self-employed people want to avail of depreciation benefits.” According to him, as against a rise in sales of around 20% in this fiscal, the auto finance industry would have grown by 30%. However, next year, the rise in demand for the auto finance market is likely to fall to 18-20%. Adds Mr Khanna. “If the rates stabilise at the current levels for the next three to four months, then the industry will feel the pinch.” Incidentally, with rising rates, tenures also seem to be increasing. According to Ravi Narayanan, head of car and commercial vehicle loans, ICICI Bank, average tenures of car loans have been increasing. They were around 42 to 43 months ago as against 46 months now. It is likely to go up to around 54-55 months this year. He said car sales this fiscal would see a growth of around 23% to around 1.35 to 1.38 million. After 2001-02, interest rates have been going down with ICICI Bank turning aggressive. Loans rates for customer post-subventions had gone down to levels of around 7.5%. However, this time around, with ICICI Bank starting to focus more on profitability than on market share alone, rates are unlikely to tumble fast.

Courtesy: EconomicTimes

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