Auto loans come cheap as competition grows

Buying a car on loan today works out cheaper than going for a home loan and the interest rate is almost on par with the government borrowing rates.

Yields on the 10-year government paper has risen to 5.31 per cent, while consumers are availing car loans for as less as 5.5 to seven per cent.

Banks are driving down car loan rates in their quest to build up assets, said Kotak Mahindra Bank group head, retail assets, Gaurang Shah.

"Interest rates of six to seven per cent on new cars plus dealers chipping in with discounts and manufacturers freebies. This has reduced the cost of auto financing to as low as 5.5 to 7.5 per cent.

The inflation rate has seen a rise and home loan companies feel interest rates have bottomed out and could firm up in the future. Though yields on the 10-year paper have seen some hardening in the last three months, financing rates for auto loans continue to be very competitive, said analysts.

"Banks are using auto loans as a customer acquisition strategy. Today, while there is a dichotomy in terms of seven to eight players controlling 80 per cent of the market, for long-term sustainability, players will need to improve their margins," said Shah. There are just a handful of auto finance companies with Kotak Mahindra Primus being the lead player.

Entry of Citibank, ICICI Bank, HDFC Bank and GE have resulted in intense competition for other auto players like Ashok Leyland Finance, Sundaram Finance and Cholamandalm Investment and Finance.

Margins have fallen drastically from the earlier two per cent to 0.5-one per cent, said an auto finance major. "Even as volumes have gone up with the rising auto sales, net margins remain constant," he said.

Automobile sales saw a growth rate of 31 per cent in January 2004 alone. In the 10-month period from April 2003 to January 2004, 7.19 lakh passenger cars were sold, reflecting a rise of 27 per cent over the corresponding period last year.

However, following rising demand for premium cars, there has been a 35 per cent growth in value terms.

With low credit offtake in the banking sector and banks pushing retail credit as a means to grow their asset books, there has been a five per cent growth in auto financing, said senior executives of a foreign bank.

Today, about 80 to 85 per cent of cars sold in India are financed by banks or auto financing outfits.