Rising interest rates see car financing rates drop

Rising interest rates see car financing rates drop
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First Published: Thu, Jun 28 2007. 01 50 AM IST
Updated: Thu, Jun 28 2007. 01 50 AM IST
Rising interest rates and higher disposable incomes are prompting more and more car buyers to use their own money and avoid bank financing.
In 2006-07, more than one million new passenger cars were sold in India; 80% of these cars were financed by banks and financial institutions. Now, about 70% of car buyers are taking bank finance. This, in effect, means more people are going for an outright purchase by using their savings.
Interest rates on auto loans have increased by over three percentage points from 9.5-10% to 13-13.5% in the past six months, following the Reserve Bank of India’s tight money policy and some consumers not wanting to deal with potentially rising monthly loan payments.
“The average share of cars getting financed has come down to approximately 70% from 80-82% a year back. It is natural for customers to move to cash purchase when interest rates go up,” said N.R. Narayanan, general manager, vehicle finance, ICICI Bank Ltd. The bank has about 35% market share in car financing.
Sumit Bali, CEO, Kotak Mahindra Prime Ltd, also says that the percentage of car buyers availing of bank finance has been going down. “The penetration has been coming down gradually in last two years since interest rates started rising. This year, it has come down to 70%,” Bali said. Kotak Mahindra Prime is one of the leading car financiers in India.
Car manufacturers are also witnessing the same trend.
“For Hyundai, the number of cars sold on finance has come down from around 86% a year back to 74% now. The impact is maximum in small-car segment, where the consumers are more sensitive to borrowing money,” said Arvind Saxena, vice-president, sales and marketing, Hyundai Motor India Ltd. The company, which makes Santro cars and is the second-largest player in compact-car segment, sold 43,972 such vehicles in April-May period of 2007-08, a growth of mere 2% over the corresponding period.
This year, on an average, banks, non-banking financial institutions and other vehicle-financing institutions are collectively lending close to Rs3,500 crore for purchase of cars in a month.
But bankers say this market is shrinking. Between December 2006 and now, auto finance rates have gone up to 13.5%. An average loan amount for a car is around Rs4 lakh. With an increase in interest of at least three percentage points, the monthly instalment for a car for a tenure of three years would have gone up by approx Rs600.
“With household budgets going up due to inflation and higher instalments for other loans taken by a consumer, there is an impact on the buying behaviour of consumers,” Narayanan said.
Indian passenger car companies sold 1.076 million vehicles, achieving 22% annual growth in 2006-07. However, in the first two months of fiscal 2007-08, the growth rate of the industry slowed to 10.8% as it sold 181,144 vehicles.
The industry is considering many options to encourage buyers to take loans. For instance, one large private bank has started offering step-up loans, where the monthly instalments increase every year in line with the rise in the buyers’ paying capacity.
“We expect that the situation will improve from July-August when the festive season will start, which is good for business of car,” said Narayanan.
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First Published: Thu, Jun 28 2007. 01 50 AM IST