Auto loan rates rev for the ride up

If you were planning to buy a new car, it would be best to do so at the earliest. Banks are all set to hike auto loan rates, or at best reduce the spread between the rack rate and the actual price at which most auto loans are sold.

"After home loans, we will also see pressure on auto loans," said Romesh Sobti, executive vice president & country representative ABN Amro.

These loans are finely priced, and players operate on wafer thin margins. "There is pressure and we expect rates to go up within a band of 25-50 basis points," he added.

Today over 70 per cent of cars purchased are under some finance scheme.

Players operate on 3.5-4 per cent margins in terms of cost of funds and the rate at which they lend. However, with the intense competition following the numerous new models coming into the country, upfront payments are made to dealers and account for about 4-6 per cent of the actual cost.

Indian auto companies have launched over 34 new models and variants in the last 10 month period, and this figure is expected to increase to over 37 by the end of the calendar year 2004.

"Lenders will correct the mispricing of auto loans, which today are quoting at unrealistically low levels," said Abheek Barara, chief economist, ABN Amro.

With a lot of sub-PLR (prime lending rate) lending, there is a clear momentum that effective lending rates are bound to rise by about 50 basis points, he added.

The hike in the risk weightage on personal loans by the Reserve Bank of India in the credit policy from 100 per cent to 125 per cent will fuel the hike as margins get affected.

While most players in the auto financing segment realise that rates need to be hiked to ensure adequate returns on capital, said a senior official with a leading foreign bank, "with us not being market leaders, we have to work within the market, which today does not allow one to raise rates."

When ICICI Bank decided to hike its prime lending rate earlier this week, it decided to keep the rates unchanged so far as personal loans and other individual loans such as car finance were concerned.

Chanda Kochhar, executive director ICICI Bank told Business Standard that the interest rates on auto loans would not be affected as these rates are determined by other aspects like dealers' and manufacturers' schemes.