After home loans, State Bank of India (SBI) today announced a limited-period offer to disburse auto loans for which interest rates would be frozen at 10 per cent for a year.
The scheme applies to all auto loans disbursed up to May 31 and interest rates will revert to the applicable rate after
June 1 next year. In a statement, the bank said it would offer loans for a seven-year period, with interest calculated on a daily outstanding balance basis, “which reduces the interest burden on the borrower as against the monthly outstanding balance or flat rate basis as charged by a few others”. SBI also said it offered loans without the payment of an advance equated monthly instalment.
For the industry, the average tenure of an auto loan is 48 months.
The weighted average cost through the special scheme comes to under 11 per cent, against current rates of 11.50 per cent and 12 per cent.
In contrast, ICICI offers auto loans at 12.25-12.50 per cent and HDFC Bank 12.50 per cent.
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Public sector players Bank of Baroda (BoB) and Bank of India (BoI), however, said they would not follow SBI. BoB offers car loans at 10.5 per cent and BoI at 10.25-11.25 per cent.
After large players such as ICICI Bank, Standard Chartered and Citibank scaled down operations in auto finance due to higher default prospects in the wake of the economic slowdown, HDFC Bank and SBI, along with its six associate banks, have been battling it out for the top slot during the current financial year.
According to industry sources, SBI, HDFC Bank and ICICI Bank accounted for around three-fourths of the market and are followed by Kotak Mahindra Bank and Axis Bank. Through the latest move, the public sector player was trying to emerge as the market leader in the segment, said a rival lender.
A senior SBI executive admitted the bank was looking to increase its market share. “We are so far more focussed on entry-level cars and by expanding the auto portfolio we hope to improve our market share,” he said. So far, the bank was booking around 10,000 car loans each month and with the latest move, it intends to double the number of proposals cleared. “So, till May-end, we will finance an additional 30,000 cars,” the executive said. The average ticket size was Rs 3 lakh.
The auto loan head at a large private bank said SBI’s move might not have the same impact as the home loan offer, where rates are frozen at 8 per cent for a year. The home loan scheme has already created a storm of sorts, with the country’s largest mortgage player HDFC, crying foul and calling it a teaser scheme. Like HDFC, an executive at a public sector bank described SBI’s auto loan scheme as a gimmick.
While HDFC Bank refused to comment, ICICI Bank Executive Director V Vaidyanathan said: “The auto industry is very important for the economy in a signalling sense, as well as what it does for the real economy. This move will bring back excitement into the market. This will expand the market and that’s good news. As far as ICICI Bank is concerned, we have a strong service proposition, our rates are competitive, we are focussed on this business and, so, we are sure we will continue to do very well and support the industry.”
“It makes sense if you borrow for a year but only 1 per cent of the auto loans have a one-year tenure,” said an executive at another large private bank.
“Pricing is a by-product of the cost of funds, the cost of operations and the risk associated with the loan. By offering loans at a very low price, you can affect the construct of the product. This is more the case with players such as SBI, as they have not factored in the cost of running the business as a separate unit and the recovery cost associated with auto loans. They will lose money on this business,” he added.
Another rival said that customers might not find the scheme attractive because public sector banks took longer to process loan proposals. Further, he said, in most cases, customers would be required to approach branches, while the auto finance business was driven through presence at dealerships.
But public sector banks have tried to fill up the gap by signing exclusive finance arrangements with auto makers. During the last 10 days, lenders such as Punjab National Bank, Syndicate Bank and Central Bank of India have tied up with Tata Motors and Hyundai to offer loans to grab a share of the pie at a time when private and foreign banks have pulled out or scaled down operations in the segment.