Mumbai: Vehicle makers in the country are stepping up lending to consumers to boost flagging demand for motorbikes, cars and trucks, but the rush to offer funding poses risks for firms in an environment of rising interest rates.
“Offering finance to the ‘right’ type of customer can be difficult even in markets where credit histories are well established, and is likely to be a bigger problem in India,” said Ian Fletcher, an analyst at research firm Global Insight.
“If Indian auto makers can make it work, it will certainly be a good move and could even prove to be profitable. But on the other hand, it also has the potential to see them lose a lot of cash.”
Interest rates on vehicle loans have risen by 2.0-2.5 percentage points over the past year. Rates are expected to rise further after the central bank’s monetary tightening last week to check inflation, which is hovering at 13-year highs and crimping consumer spend.
Private lender ICICI Bank Ltd is suspending two-wheeler loans at the dealers’ end.
On the other hand, the finance arms of vehicle maker Tata Motors Ltd and utility vehicle maker Mahindra and Mahindra Ltd are expanding lending. This comes at a time when global rivals such as Ford Motor Co.’s finance arm are cutting back amid tight credit markets, rising customer defaults and falling vehicle sales.
Tata Motors Finance is focusing on smaller towns and rural areas that banks have shied away from, managing director Ravi Kant said.
The percentage of Tata vehicles sold that are financed by the arm has risen to 35% from 20% a year ago, Kant estimates, adding this may rise further.
Since April, sales of Tata Motors have edged up only 2% from a year ago, with sales of its passenger vehicles falling 4.5%. Sales at Bajaj Auto Ltd’s two-wheelers rose 11%, compared with an average growth of more than 25% a year ago.
Ratings agency Crisil Ltd said in a report last week that Indian retail loan quality had deteriorated due to high interest rates, a decline in credit standards and exposure to high-risk customers, an outcome of strong credit growth from 2004 to 2007.
Vehicle assets make up about a third of all retail loans, and gross non-performing assets in car loans may rise to 3% in 2008-09 from 2.7% last year, said Crisil.
“Earlier if we saw stress on two or three parameters, now we are seeing it on five or six parameters because of inflation and higher interest rates,” said N.R. Narayanan, head of vehicle finance at ICICI Bank. “Intuitively, people entering a new segment, like entry-level bikes or first-time commercial vehicle buyers, are more likely to feel the stress as their finances are vulnerable.”
Delinquencies for finance arms of vehicle firms may be 1.0-2.0 percentage points higher, says Tarun Bhatia, head of Crisil’s corporate and government ratings, because their lending norms are more relaxed and therefore asset quality poorer. “It is very hard for a manufacturer to say ‘no’ to a customer who is in a showroom and wants to buy a car or a bike, as opposed to a bank, which has very strict guidelines,” said Bhatia.