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ICICI Bank says floating rate will spur car loan off-take

ICICI Bank is hopeful that its recently introduced floating rate car loan will help reverse the slowing car loan market ahead of the festive season.

Apnaloan.com Research Bureau

11 Sep 2007

ICICI Bank is hopeful that its recently introduced floating rate car loan will help reverse the slowing car loan market ahead of the festive season.

"I feel that customers who are waiting for the interest rates to come down will now make their decision to take a car loan with the help of floating rate of interest," said N R Narayanan, Head, Auto Loan, ICICI Bank.

ICICI Bank has introduced floating rate car loans from September 1, 2007. This is the first time the bank is offering floating rate interest for car loans. Even though some public sector banks like State Bank of India do have floating rate car loan, it was never a popular option. This is the first time a major bank is aggressively pushing floating rate for car loans.

The floating rate car loan of ICICI Bank is priced 50 basis points below the fixed rate car loan, which currently is in the range of 14% to 14.25%. All other charges like processing fee and prepayment fee will be same as for the fixed rate loan. ICICI Bank's floating rate car loan is linked to its Floating Reference Rate (FRR), which currently is at 12.75 per cent. The mark-up on the FRR is 75 basis points to 100 basis points, which mean, the effective rate for customers will be 13.50% to 13.75%.

The gap between ICICI Bank's and most other banks' floating rate and fixed rate for home loan is about 2% to 2.5%, while for car loan the difference is only 50 basis points.  "The difference is due to the longer tenure of home loan. Home loan tenure is usually15-20 years, while for the car loan it is 3-5 years," said Narayanan. He also said the floating rate will be applicable only for standard new car loans and not on overdraft facility.

Interest rate on car loans had shot up by 3% to 4% in the past 1-2 years, leading to considerable slow down in car sales in the last few quarters as well as loan off-take from banks. Nearly 80% of the car purchases are funded by a car loan. September to December period, which coincides with the festival season, traditionally witness a spurt in new car sales. ICICI Bank's introduction of floating rate is targeted at festive season car purchases and the large number of car purchases that traditionally occur before September 30 to take advantage of depreciation claims for tax purposes.