New Delhi / Mumbai: It might be the world’s newest and cheapest car, but if you are thinking of taking a loan to finance the Tata Nano, then expect to be treated as a buyer of a second-hand car.
That’s because the most attractive feature of the highly anticipated car—its Rs1 lakh price tag—is potentially making it more of a risky proposition for some lenders, who anticipate a rush of less well-off applicants.
As a result, if the financiers of vehicles have their way, they plan to squeeze out more from buyers of the Tata Nano because the customer risk profile of loan applicants is likely to straddle between those who finance two-wheelers (typically higher risk) and those who buy new cars.
EXPENSIVE FUNDING (Graphic)
Several leading auto loan financiers are already saying that typical loan applicants for the Tata Nano might be people with lower incomes, thus putting them in the category of used car buyers, for whom len-ding rates are higher.
As a result, it is likely that these Tata Nano loan applicants may have to pay annual interest rates of between 17% and 18%, at least 250 basis points more. Typically, for new cars, banks currently charge around 14.5%. A basis point is one-100th of a percentage point.
“It is going to be a high number game and the risk would be more,” said the head of a vehicle finance company, who didn’t want to be identified, saying: “It wasn’t the right time to go public on this car. The risk profile is likely to be similar to that of used-car customers, that is people looking to buy a first car graduating up from a two-wheeler.”
Two-wheeler loans typically have interest rates of between 21% and 23% because applicants are most likely to have trouble in repayments because of low incomes and hence fall into the high risk category.
Indeed, two-wheeler sales have suffered in recent months as lenders pared their loans in this category citing a credit squeeze and higher delinquency rates. Interest rates for such loans have nearly doubled in the past two years and two-wheeler sales fell nearly 8% in the same period.
“The pricing (on a loan for the Tata Nano) is going to be a function of the expected delinquency, given the (high-risk) customer segment and the losses, given the depreciation of the car. Unless we can assess these, bankers are erring on the side of caution,” said Ananda Bhoumik, a senior director at Fitch Ratings.
Ratan Tata, chairman of Tata Motors Ltd, India’s largest auto maker by sales, has often said that he got the idea of developing the world’s cheapest car after seeing families of four travel, often dangerously, and in all weather conditions on two-wheelers. He wanted to give them a safer, more affordable option and so when he unveiled the car in January this year, he held on to the promised price of Rs1 lakh.
With taxes and insurance added, the cost to the consumer is likely to be around Rs1.3 lakh for the no-frills variant. Tata Motors is likely to attract some of the 50 million two-wheeler owners in India, many of whom pay up to Rs50,000 for a motorcycle, looking to upgrade to the Tata Nano.
While most bankers Mint spoke to said they were eager to finance what is likely to be a surge in applications for the Tata Nano, given its price and early hype, there were some who said they are not too keen on this segment.
“I am not too hot on financing this vehicle. We will wait and see how the segment evolves and then take a call,” said a Mumbai-based private lender, who didn’t wish to be quoted as he didn’t want to hurt business relationships with Tata Motors.
He also noted that “there is also speculation on whether the car will be launched only in semi-urban and rural areas and not the metros”, where the customer profile is again different from the typical urban loan applicant.
Typically, the risk profile for rural consumers is more since they don’t have proper income statements and identification papers, and whose livelihoods depend on seasonal occupations such as farming.
“One has to look at the performance of a vehicle and only then decide how much exposure can be taken,” said the vehicle finance chief of another leading bank on condition of anonymity.
While bankers have a consensus on the kind of lending rates for this car, they are yet to decide on what proportion of the vehicle cost they will finance. Only 75% of a car’s cost in India is financed by lenders now, compared with 90% a couple of years ago, because lending rates at a six-year high and inflation at a seven-year peak are making financiers less confident on whether consumers will be able to repay loans on time.