Mumbai/Delhi: Even as banks have been forced to cut back on lending to buyers of cars and bikes, vehicle financing arms of auto makers such as Mahindra and Mahindra Ltd and Tata Motors Ltd have not been able to take advantage and increase their share of the business.
A captive financing arm is a more willing lender in times of a tight credit environment to push sales of the company’s vehicle brand, but analysts say that faced with the same stringent norms and market risks as any other financier, they too have turned cautious.
“I don’t think that the in-house vehicle financing arms have improved their business because a negative profile is a negative profile for everyone,” said a senior executive of a leading bank, who did not want to be named since he is not authorized to talk to the media. “I also don’t think that they will be able to make too large a dent since banks are better placed to spread the risk across various products.”
In India, banks also score over non-banking financiers since they have a larger network of branches and more variety of products, or types of financing options, for customers to choose from.
Hatim K. Brochwala, equity research analyst at brokerage firm Khandwala Securities Ltd, agreed with the bank executive. “They (auto makers’ in-house financing arms) would have to follow (the same) strict norms. The segment has become risky and financiers would lend cautiously.”
Brochwala also said the market had expected interest rates to come down at the start of this fiscal year, but “with inflation rising, the fall of rates in the short-term does not seem likely.”
India’s last reported inflation stands at 7.14%. On Thursday, the Reserve Bank of India increased the cash reserve ratio, or the mininum amount banks have to maintain with the central bank, by half a percentage point to 8% in an attempt to fight infation. The move effectively limits banks’ ability to lend more money and interest rates are unlikely to move down any time soon.
Interest rates rule around 11.75-12.5% for car loans and 23% for bikes, making it difficult for vehicle buyers to repay their loans. Hence banks, wary of piling up bad debt, have become more cautious in lending to high-risk customers who typically borrow low amounts to fund cheaper purchases such as two-wheelers.
“While all of us fit in one block (of being vehicle financiers), not all of us compete together. This depends on our products, customer profile and geography (size and spread of branches),” said Ramesh G. Iyer, managing director, Mahindra and Mahindra Financial Services Ltd, the vehicle financing arm of the utility vehicle maker.
Iyer is referring to the fact that it is not easy for manufacturers to change their vehicle finance partners, be it banks or their in-house arms, because complex issues involving charge of interest, credit limits and the size and depth of lenders’ network have to be looked at carefully.
Cheap vehicle financing, with lending rates as low as 9% and loans up to 90% of the vehicle cost, has played a major part in boosting auto sales in the past few years.
Till about a year ago, 65% of all two-wheelers and 85% of cars sold in the country were bought on credit. This has fallen by as much as 20 percentage points last fiscal year.