Mumbai: The launch of the Tata Nano, the world’s cheapest car later this year may put some spark back into auto financing and car purchases that have been hit by five-year high interest rates and rising fuel prices.
Huge opportunity: At current interest rates, a Tata Nano buyer will have to pay Rs3,000 per month for a five-year loan, twice the amount a two-wheeler buyer will pay for a three-year loan for a bike costing Rs40,000.
Lenders say they are unlikely to hold back on lending to the Tata Nano, which will likely cost around Rs1.3 lakh, almost half the price of the existing cheapest vehicle on Indian roads, the Maruti 800. Lenders have traditionally responded to tight credit environments by cutting back on financing high-risk customers who typically borrow low amounts to fund cheaper purchases, such as two-wheelers.
“The Nano is a trendsetter and we expect the market to grow. We are keen to finance it,” said Sumit Bali, CEO, Kotak Mahindra Prime Ltd (KMP), the vehicle financing arm of Kotak Mahindra Bank. KMP, which does not disburse loans for two-wheelers, is likely to finance 75,000 cars by the end of the fiscal.
Indian auto makers need a nudge because two-wheeler sales have dropped, while growth in passenger car sales is slowing. Banks, wary of accumulating bad loans, have become more discerning in lending to these customers, which has resulted in a 5% slump, in terms of sales across cars, trucks and motorcycles in the last nine months.
Bali added that while financing the Nano would increase his company’s risk profile, the market simply cannot be ignored. Other financiers are also of a similar opinion.
The base model of the Nano with no air conditioning or power steering is likely to cost Rs1.3 lakh on the road, and will most probably attract many motorcycle riders who want to upgrade to a car. At current interest rates of 12.5%, a customer buying a Nano will have to pay Rs3,000 per month for a five-year loan. That is twice the amount a two-wheeler buyer will pay per month on a three-year loan for a bike costing Rs40,000.
“The expectation is that the interest charged would be higher and bad loans too would be higher,” said Arshad Khan, associate director, Fitch Ratings, a credit rating firm. “It is a new segment and financiers are still assessing the market. They have to be there because it is a huge opportunity.”
Financiers further point out that buyers of the Nano are going to be varied, and not only restricted to two-wheeler users. People who currently do not own any vehicle, and those who are looking for a second car to commute short distances are also likely to go for the Nano, they say.
“I don’t see an impact on the two-wheeler industry. It is going to be (the repeat of the) Tata Ace story. When the Tata Ace came, people said it would impact light commercial vehicles and three-wheelers. It didn’t impact both and created a separate segment altogether,” said a senior executive at a finance firm, who did not want either himself or his company to be identified.
Launched in 2005, the Tata Ace is the largest selling light cargo carrying vehicle in the country with sales of more than 60,000 units a year. While the Ace has not completely replaced three-wheeler cargo vehicles, it has slowly eaten into their market share and created a separate market segment, thus forcing other manufacturers to launch similar vehicles.
About 85% of all cars bought in India are through a finance option.
Tata Motors Ltd has roped in its financing arm, Tata Motors Finance Ltd, to initially offer financing options to customers of the Nano, a report in the Business Standard daily said. Nothing has been decided though, and a Tata spokesman said the company did not have any information to share at this moment.
Executives at finance firms said that despite risks involved, companies in the business would do well because more people will line up for loans.
“Financing will always be good. With small (and cheaper) cars coming in, the kind of customers that are going to enter the car space is going to rise exponentially. In the next three-four years, this will easily reach over 2.2 million including the Rs1 lakh car,” said N.R. Narayanan, group business head (vehicle loans) at ICICI Bank Ltd. ICICI Bank is the biggest financier of vehicles in India and advances close to one-third of the Rs42,000 crore disbursed every year in the country for buying automobiles.
There is also some indication that companies that are only financing two-wheelers currently are starting to finance four-wheelers, partly influenced by the launch of the Nano.
“We are going to start financing new cars by early 2008-09, though this comes from our own customers who are upgrading to new cars. The Nano is incidental,” said Subhasri Sriram, executive director, Shriram City Union Finance Ltd, which finances two-wheelers and used cars. It is a natural transition for two-wheeler financiers to also get into the used car financing and then new car financing as customers change their lifestyles, Shriram added.
“Everybody would want a piece of the pie,” said Fitch’s Khan.