 "FM, Rajan get behind the wheel to drive festive sales")
The decision was taken in principle at a meeting between Finance Minister P Chidambaram and RBI Governor Raghuram Rajan. Economic Affairs Secretary Arvind Mayaram was also present. Pawan Goenka of Mahindra & Mahindra met Revenue Secretary Sumit Bose to push for lower tax on sports utility vehicles and lower interest rates on auto loans. Chidambaram will soon meet heads of public sector banks to impress upon them the need to lower interest rates in select sectors. "Lower interest rates will depend on the lending capacity of banks. Banks will decide on sectors where lower rates will boost demand. I will meet bankers soon," he said.
"The government has decided in principle to enhance the amount of capital to be infused into public sector banks (PSBs). In the Budget for 2013-14, a sum of Rs 14,000 crore was provided for capital infusion. This amount will be enhanced sufficiently," the finance ministry said in a statement. It did not give specific figures of the money to be given to banks for this purpose.
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Companies in the sector were divided over the efficacy of the move. Some said it would improve market sentiment but others said it would not give a major fillip to consumer demand and sales.
In the two-wheeler industry, 30-40 per cent sales are though consumer finance. "Whether it pushes sales will depend entirely on the quantum of the reduction in interest rates. If it is negligible, it won't make a difference, Also, it is possible that consumers buying in cash might shift to a financing scheme, so overall sales may not get impacted," said Rajiv Bajaj, managing director of Bajaj Auto, the country's second largest two-wheeler company.
"This is a welcome move and is expected to improve the buying sentiment in the festive season. More than a substantial saving in EMIs, we see it having a positive impact on the market ecosystem," said Y S Guleria, vice-president, sales and marketing, Honda Motorcycles and Scooters. Consumer durable (excluding mobile phone) manufacturers while welcoming the move on the record privately admitted that it would not lead to a major push for sales. Currently, about 12 per cent of the industry sales are through financing and credit card schemes. For premium products like LCD TVs and top of the line refrigerators this could go up to 20 per cent cent.
However, a senior executive of a top consumer electronics company said, "Most of the loans are given by private banks or NBFCs and are limited to metros and Tier-I cities. PSBs would have less than 10 per cent share of this business, mostly with the State Bank of India. Credit cards offers are offered mostly by private banks."
The impact could be seen only at the top end of the market. Most companies in the past few years have used financing to upgrade consumers to high-end products. The bulk of the financing, explained Suresh Kumar Bandi, divisional deputy MD, Panasonic, was for products above 35,000.
"For products below 20,000, financing is not substantial," he said. Interestingly, it is the two-wheeler segment that has bucked the trend of low sales growth in automobiles in September. Market leader Hero MotoCorp sold almost 16 per cent more vehicles at 468,670 units in September compared to 404,787 a year ago.
Consumer durable production has been witnessing contraction in the current financial year. While the index of industrial production rose moderately by 2.6 per cent in July year-on-year, consumer durable output fell 9.3 per cent. In the first four months of the current financial year consumer goods production declined 12 per cent, clearly showing that the contraction was greater in earlier months.