Floating loans may beat auto blues

NEW DELHI: Banks and finance companies have started offering floating-rate auto loans in order to reduce the impact of high interest rates. Higher rates have led to a decline in sales for most segments of the automobile industry.

ICICI Bank, public sector banks SBI and PNB and Kolkata-based Magnum Finance are offering this product. Based on customer feedback and persistent demand from car companies, banks and finance companies have started floating rate schemes from this month.

ICICI Bank, the market leader in auto loans, is offering floating interest rates on different finance packages from September 1. ICICI Bank auto loans head NR Narayanan told ET, “Customers wanted to hedge the benefits of any changes in interest rates. They had been demanding floating-rate schemes similar to home loans. Now we are offering them the option to take floating interest rates schemes on all kind of cars right from Maruti-800 to luxury marquees like BMW and Mercedes.”

This means that the interest payable on auto loans will decline if general rates come down. Of course, the flip side is that if monetary conditions tighten further, borrowers will have to pay more. The consensus is that interest rates are likely to decline over the medium term.

The floating rate options to customers are likely to increase liquidity in the automobile market. It is expected to expand the monthly Rs 3,000 crore auto loan market by 5% in the next two-three months. Officials say this is likely to increase the demand for vehicles in coming months and add around 5,000 new cars to the monthly sales tally.

“With the general perception of interest rates moving southwards, the floating rates option will bring in more customers. As a discount option, we are offering floating rates at 50 basis point lower than fixed rates to lure customers,” Mr Narayanan added.

Auto sales have been hit hard by high interest rates. While the passenger car segment has posted a single-digit growth, commercial vehicles sales are flat and two-wheeler sales are down by 10% in the first five months of this fiscal.

The root cause remains high interest rates, forcing customers to postpone their purchases. The current interest rates on auto loans are around 14%, up from last year’s average of 8-9%. The impact of rising interest rates had hit most of the car companies, which had posted flat sales for the first five months of this fiscal, Maruti Suzuki being the only exception.

Maruti Suzuki managing director Jagdish Khattar said, “The marketing schemes and hefty discounts offer by us had helped to push up the sales. If banks are offering flexible finance options to customers, it will definitely help cash in higher numbers”.