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SBI freezes rate for auto loans at 10% in a bid to spur demand

SBI freezes rate for auto loans at 10% in a bid to spur demand
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First Published: Fri, Feb 20 2009. 10 46 PM IST

A step ahead: SBI chairman O.P. Bhatt. The bank’s latest move comes on the heels of a similar freeze on home loan rates at 8% in January. Ashesh Shah / Mint
A step ahead: SBI chairman O.P. Bhatt. The bank’s latest move comes on the heels of a similar freeze on home loan rates at 8% in January. Ashesh Shah / Mint
Updated: Fri, Feb 20 2009. 10 46 PM IST
Mumbai: In what could prove to be a solitary action rather than the opening salvo of an interest rate war, State Bank of India (SBI), the country’s largest lender, on Friday froze interest rates on auto loans at 10% for a year, sharply down from the current 11.50%. However, other banks seem unwilling to follow suit.
A step ahead: SBI chairman O.P. Bhatt. The bank’s latest move comes on the heels of a similar freeze on home loan rates at 8% in January. Ashesh Shah / Mint
Early this month, in a similar move, SBI cut its home loan rate to 8% for a year.
An SBI release said the bank will freeze interest rates on new car loans taken between 23 February and 31 May for one year. After a year, the loan rate will be reset at the “applicable card rate” prevailing at the date of sanction.
Private banks are not in a hurry to cut interest rates on auto loans. In mid-January, HDFC Bank Ltd had reduced its auto loan rates by 150 basis points to 12.25-12.50%. One basis point is one-hundredth of a percentage point.
ICICI Bank Ltd charges interest in the range of 12.25% to 12.50% for auto loans. An ICICI Bank official declined to comment on the SBI rate cut.
Foreign banks, too, are not too excited about selling auto loans. “In the current economic environment, the challenge is getting a customer with a right credit portfolio. This is a time to consolidate the business,” said a senior foreign banker on condition of anonymity.
A private sector banker, again on condition of anonymity, dubbed the SBI move as a strategy to gain market share. “We are not in the game of market share. We are looking at building a quality portfolio,” said the banker.
However SBI officials said this is a move to create demand and spur a slowing economy. “We expect that consumers will take advantage of the low rate and buy cars. This will help clear the inventory of auto firms and improve their cash flow. They will also be able to clear the dues to their vendors,” said a senior SBI executive.
According to P. Balendran, vice-president, corporate affairs, at General Motors India Pvt Ltd, the SBI gambit will definitely help push volumes. “However, it will take a while before it percolates down to the buyers as they may wait for other banks to follow the move,” he said. General Motors has a tie-up with Bank of Baroda for auto finance.
“It will clearly put pressure on others to reduce the interest rates. We will benefit from it. In past six to eight months our exposure to public sector banks has been doubled to 30%,” said Arvind Saxena, senior vice-president, marketing and sales, Hyundai Motor India Ltd.
Auto firms have increasingly been joining hands with public sector banks as they finance 85% of a vehicle’s value. In contrast, private banks generally offer 70-75% of the value of a vehicle as loan.
However, not every one is convinced of the efficacy of the SBI strategy. Mahantesh Sabarad, an analyst with Centrum Broking Pvt. Ltd, a Mumbai-based brokerage said, “This model will not work as the interest rates would be revised after a year. People would rather prefer to know how much do they need to pay eventually. While other banks may reduce rates, it may not offer the same rate of interest.”
About 85% of cars in India are financed by banks. According to analysts, non-performing assets, or NPAs, in the new car loan segment is about 2-3%. But NPAs in the commercial vehicle segment could be as high as 8% for banks.
Earlier on Friday, before SBI made its announcement, Toyota Kirloskar Motors Ltd said it is firming plans to launch the group’s financial services business in the country to boost demand. Toyota’s sales in India have fallen 50% in the second half of 2008, Hiroshi Nakagawa, managing director, told reporters at a conference in Pune.
The situation continues to be tough as bank loans remain unavailable to buyers, Nakagawa said.
A day earlier, on Thursday, Skoda Auto India Pvt. Ltd, the local subsidiary of Czech car maker Skoda Auto, said it is entering into a tie-up with Volkswagen Financial Services AG, a subsidiary of the Volkswagen group, to offer customized financing for potential buyers from mid-2009.
Public sector banks have been trying to push demand in the retail segment by cutting their lending rates even as the year-on-year growth in bank loans has sharply come down to about 19.5% from 30% in past few years.
SBI and other public sector banks in January brought down interest rates on home loans to 8.5% and frozen this for five years. SBI later brought down the interest rate further to 8% for one year.
Country’s largest mortgage lender Housing Development Finance Corporation Ltd, too, has brought down its home loan rates.
More than one banking sector analysts said the lowering of interest rates will not dent banks’ profitability. This is, in fact, a wise way of using the excess liquidity that some of the banks have as if they park the money with Reserve Bank of India, they can earn only 4%. Banks have parked in excess of Rs42,000 crore on an average with the central bank every day this week.
SBI also reduced its rates for loans to farmers against cold storage and warehouse receipts to 8% from 10.5-14.25% earlier. This loan is also fixed for a year.
Since October, the Indian central bank have injected at least Rs3.2 trillion in the system through various ways and banks are flush with liquidity.
anup.r@livemint.com
Anita Bhoir, Sudha Menon and PTI contributed to this story.
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First Published: Fri, Feb 20 2009. 10 46 PM IST