ICICI Bank will introduce the option on Monday; move aimed at curbing delinquency.
Indian private sector banks are now following the state-owned lenders in offering floating rate or variable rate of interest on two-wheeler loans in an attempt to protect margin and also make up for increased delinquencies in the segment.
ICICI bank, which was the country's largest two-wheeler loan provider before it pulled out from the dealer's end, will introduce floating rates of interest for two-wheelers on Monday to keep pace with rising interest rates and also protect its margin.
Many private sector banks, including ICICI bank, shut down their two-wheeler financing operations in markets like Bihar, Haryana, Uttar Pradesh, Rajasthan and Madhya Pradesh due to rising defaults. Citibank has altogether pulled out from the two-wheeler lending space.
Two-wheeler financing default rates are expected to climb to almost double digit by this year end from 5 per cent earlier as the lower and mid-income bracket, which are bulk of the buyers for this segment, have been hit most by galloping inflation and a slowdown in the economy.
A banking expert said that most private two-wheeler loan companies are evaluating options to launch floating rates for two wheelers, though most of them refused to come on record. When contacted, Hemant Kaul, head (retail), Axis Bank, said, "We are yet to take a decision on the issue (of introducing floating rates)".
Operational costs of many banks have also been burdened by rising default cases, coupled by the general inflationary scenario. "For every Rs 1,200 equated monthly instalment (EMI) on a bike, we have to spend about 5 per cent of it (Rs 60) on phone calls and about Rs 150-200 on physical collection (about 15 per cent) if repeated calls fail," a banking official said.
Non state-run lenders are also introducing floating rate interest to keep competitors including two-wheeler makers’ owned finance companies at bay who are now trying to capture the market vacated by these banks. Due to the significant reduction in the lending exposure by banks, many leading non-banking finance companies (NBFCs), such as Bajaj Auto Finance, Fullerton India, Mahindra Finance and Tata Motor Finance, have decided to increase their reach in the market.
Tata Motor Finance has said that it will expand its customer reach to accommodate the launch of the Nano, which is expected to see huge demand. Bajaj Auto Finance also plans to step up its expansion programme and extend the finance option to all Bajaj Auto dealers.
Finance companies are trying to woo two-wheeler customers by saying that they buyers of vehicles could stand to benefit when interest rates drop.
"We will introduce floating interest rates as we believe that the rates have peaked now. If a buyer avails a 4-year loan today on a floating rate, he will stand to benefit at a later date when the Reserve Bank of India (RBI) reduces rates," said a senior ICICI Bank executive.
The slew of new models in the pipeline and robust demand have resulted in banks remaining buoyant on the two-wheeler industry despite a slowdown in economic growth.
The segment posted a 10 per cent growth in sales during the four-month period ended July 31, 2008, even as growth in other segments, such as passenger cars, slackened.
