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Car loan rates: Wait & watch, say auto financiers

Bankers have refused to commit whether there will be a hike in car loan rates after the liquidity tightening measures announced by Reserve Bank of India.

Harsh Roongta

14 Aug 2007

Bankers have refused to commit whether there will be a hike in car loan rates after the recent liquidity tightening measures announced by the Reserve Bank of India.

The credit policy announced by RBI Governor Dr Yaga Venugopal Reddy has brought about a 50 bps hike in Cash Reserve Ratio (CRR). CRR is the proportion of funds  that the banks should keep with the central bank. There is a general expectation that the policy shall stall the pace at which the interest rates or lending rates were expected to reduce. According to experts, it will take some time (around 10-15 days) to see the effects of the credit policy on the car loan front and consumers are asked to wait and watch.  

There is cause for some worry if we go by what banks have to say. As Ravi Narayan, head of auto financing, ICICI Bank, safely puts it, With a CRR hike, some amount of liquidity is going to be sucked out of the system. As this happens, there is a chance of some stress on interest rates. The stress can be with or without an increase in interest rates.

However, car manufacturers are hopeful that better product and marketing initiatives will help them overcome any upward trend in interest rates.

As the spokesperson of an Indian car manufacturer puts it, The credit policy has a say on how the loan market is going to behave. An increase in car loan rates definitely demoralizes the customer. But we come up with better marketing initiatives to buffer the effect and get around the tough times created by monetary policies.

This particular car manufacturer showed an improvement in sales last year of around 2%, when other car manufacturers saw their sales going down. Though most of the banks have denied any possible knee-jerk reaction in car loan rates at present, the manufacturer is wary of the backlashes.

As Harsh Roongta, CEO Apnaloan.com puts it, The credit policy will not have any immediate impact on car loans, though it is one of the important cogs in deciding market rates. Essentially, though nobody predicts a major change in interest loan rates, one can be assured of some action in this sector.