Mumbai: In an attempt to spur slowing car sales, auto-finance firms such as Kotak Mahindra Prime Ltd and ICICI Bank Ltd have partnered with manufacturers and dealers to reduce the interest rate on car loans by 0.50%.
Over the past three months, ICICI Bank, India’s largest car financier, has increased the cost of its loans by 2.5%. Other financiers have increased rates on their loans too. The consequent slowdown has provoked fears of a slowdown in an industry that sold 1.3-1.4 million units (cars and sports-utility and multi-utility vehicles) in 2006-07. An executive at a large financing firm said, on condition of anonymity, that sales of two large car makers had dropped 20% in the first three weeks of March.
The 0.50% reduction comes after car makers approached the financiers. “We have brought down the interest rate on car and commercial vehicles loans on an average by 50 basis point from Tuesday this week. The cost of reduction is jointly borne by the auto makers, dealers and our bank,” said Ravi Narayanan, group business head, car and commercial vehicle, ICICI Bank.
Car makers believe that the reduction will be sufficient to boost demand in the dying days of the current financial year that comes to an end on 31 March.
March is historically a key month for car sales; companies who buy cars in this month can claim depreciation for an entire six months (October to March), and the benefit, which takes the form of a reduction in tax, is the highest when cars are bought on 31 March.
Narayanan’s comment would mean that car makers are bearing part of the cost of the reduction in interest rates. The dealers are likely to have agreed to a reduction in their commission on sales; the lower interest rate could help them clear their inventories.
Kotak Mahindra Prime, a subsidiary of Kotak Mahindra Bank Ltd, has also reduced the interest rate by 0.5%. “We have brought down the interest rate on car loan by 50 basis point from Monday this week. We are doing it with selected companies to help them get over the inventory problem at the end of the financial year,” said Sumit Bali, chief operating officer, Kotak Mahindra Prime.
ICICI has partnered with almost all leading car makers such as Maruti Udyog Limited and Honda Siel Cars India Ltd, and their dealers to offer reduced interest rate.
The interest rate on large cars has been brought down from a rack rate of 15.75% to 15.25%, and for small cars, it has been brought down from 15.5% to 15%. “The new interest rate is likely to continue next month as well, as April is expected to have a higher inventory for the dealers,” said Narayanan. Other banks that were approached by the car makers preferred to wait and watch. “We were approached by auto makers for reducing our interest rates. In April, if the liquidity conditions change than we may consider a reduction in interest rates,” said Ashok Khanna, vice president and head of auto loans, HDFC Bank, a leading auto loan finance company.
India’s largest public sector bank State Bank of India (SBI) too has kept its loan rate unchanged. “Our interest rate has been already substantially lower than the private banks. So we have kept it unchanged,” said Yogesh Agarwal, managing director in charge of national banking, SBI.