Shed regional bias on vehicle loans, urges FM

Finance Minister P Chidambaram has asked banks to ensure that there is no lending bias against any state in providing vehicle loans, after automobile majors expressed concern that banks were not forthcoming in giving loans for cars and two-wheelers in certain states, adversely affecting their sales.

Earlier this month, the finance minister had met chief executives of large banks and representatives from automobile and other industries to review the slowdown in demand. The minister had urged banks to reduce interest rates so that interest rate sensitive sectors did not suffer. At the meeting, the minister had also appealed to banks not to leave out any state in the distribution of credit for the auto segment.

"It was seen that geographically in certain states, banks were not forthcoming with tie-ups for giving loans for two-wheelers and four-wheelers. In certain states, companies felt that sales were very low. Wherever the credit flow to this segment is not there in certain states, the finance minister wanted us to take a view to see that it (credit) is uniformly spread," said the chairman and managing director of a large public sector bank, present at the meeting.

Banks, faced with mounting defaults on vehicle loans in certain pockets in northern states such as Haryana, Rajasthan, Uttar Pradesh, Uttarakhand and Bihar, have been going slow on giving new loans in these states. Private sector banks are even closing their distribution outlets in these states.

"Periodically, we have to take a course correction in a certain geography, if delinquencies are high. Some pockets have issues of borrower profile, law and order, and we are going slow for sometime," said the head of vehicle finance for a private sector bank.

Banks, while lending in these states, are following a much stricter due diligence and have more checks and balances in place. Some banks are also increasing the amount borrowers are required to bring in for the loans. According to the recovery head of a large private sector bank, "Recovery officials find it difficult to take possession of the vehicle, when the borrower fails to repay the loan, forcing the bank to write-off the loan. In some instances, even though we have taken a decision to go slow in these states, the official is scared to outright reject a loan request, for fear of being threatened by the customer."

Banks consider a loan loss ratio of upto 2 per cent for car loans and 4-4.5 per cent for two-wheeler as acceptable. Interest rates on car loans range from 11-12 per cent and on two-wheelers 15-19 per cent. The interest rates factor in losses due to defaults.

"The yields are quite good. The finance minister said take a view on yields. We said public sector banks do not charge more than 11.5 "�12 per cent on these loans," said a chief executive.

"However, while, the vehicle finance portfolio may see a default rate of 5 per cent, in certain pockets in Haryana, Rajasthan, it could be upward of 10 per cent," said a public sector bank official.

The credit deposit ratio in Haryana, Uttar Pradesh, Uttarakhand and Bihar at 51.53 per cent, 44.36 per cent, 28.41 per cent and 30.89 per cent, respectively, have always been low, while Rajasthan has a high credit deposit ratio of 82.29 per cent.