Drive away your dream car at lower rates

May 8,2007: Mumbai: With car sales hitting the slow lane in the past few weeks, vehicle manufacturers, financiers, dealers and direct selling agents (DSAs) have come together to lower interest rates on auto loans.

The effective interest rates to the customers have dropped by as much as 4.5% in some cases because of these new schemes. Two of the biggest manufacturers Maruti Udyog and Hyundai Motor India have roped in major car financiers to offer customers loans at discounted rates.

Other car makers like Ford India have also started off talks with financers. Hyundai was the first manufacturer to kick off a discount game when it started offering loans for its flagship model, Santro Xing, at 8.99%. India’s largest car maker then stepped up to the challenge and tied up with some of the bigger financiers like ICICI Bank and HDFC Bank to offer car loans at 7.99%. The scheme is available on Maruti’s top selling models — Alto, Wagon R and Swift.

However, Maruti says the scheme is more a local arrangement and not a national level tie-up with the financiers. A company official also said its sales have continued to grow substantially despite the interest rate damper. Car makers are taking Rs 12,000 to Rs 18,000 off the ex-factory price, depending on the region and the vehicle model.

In some cases, manufacturers are offering higher discounts which could effectively either reduce the interest rates or bring down the down payment made by the customer.

Financiers are also doing their bit by dropping interest rates by around 25 basis points (0.25%). Direct selling agents (DSAs) employed by private sector banks are also doing their bit by ploughing back around 3.5% against 2% before. DSAs get around 4.5% in subventions from financiers.

The effective interest rate for customers, which was around 12.5% (after taking into consideration various discounts and subventions) in March, has now dropped to 8-9% on select models as a result of discounting at various levels by manufacturers, dealers and financiers. However, the discounted interest rates will be short lived like in the case of Maruti where the schemes are available only till the end of April.

High interest rates seem to have had its effect on sales. Interest rate on a one year loan is at 17%, two years at 16% and 3 years and above between 12.5 to 15.5%. If sources are to be believed, a car market biggie has seen a 30-35% drop in its sales in April, while another volume player’s sales have slipped 20-25%. The slump in retail sales is not reflected in the monthly sales numbers released by these companies, as that is a statement of dealer sales.

Stockpiles have been building up at the dealer-end in the case of most major car manufacturers. Says Ashok Khanna, EVP, HDFC Bank, “There is a genuine demand slowdown. And manufacturers are trying to woo customers by offering subventions and negotiating cheaper interest rates. However, if they fail to woo the customers with these schemes also, the first quarter would be tough for the auto industry.”

In order to circumvent these high interest rates, customers are opting for cash purchases or approaching PSU banks for loans. Japanese car maker Honda is in talks with nationalised banks to get more competitive rates of interest than those offered by the private banks, confirmed a company official.

Incidentally, cash sales as a percentage of overall sales, have seen an upward trend in the past few months. “Cash sales which were 18% last year in October have now gone up to 28%,” points Ravi Narayanan, head of car and commercial vehicle loans, ICICI Bank. According to a senior banker, the schemes have started having its effect.

Dealership walk-ins, post the Hyundai scheme, have increased from around 8 to 10 to around 16 a day. Also the conversion rates (customers buying the cars) have increased from 10 to 30%. However, this is still much lower than earlier conversion rates of 45-50%. “Everyone including manufacturers, dealers, financiers will have to put on their thinking hat. They will have to bring in more innovation,” says Mr Narayanan.

According to a senior banker, sales are not up to expectations as customers do not want to commit at this point of time. “Everyone wants to be liquid. No one wants to commit,” he added. One will have to see how these schemes work as April is supposed to be a slow month with the first 15-20 days typically seeing a slow off take.

(Courtesy: Economic Times)