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Car sales begin to skid

Car sales to fall due to increase in interest rates on loans.

Apnaloan.com Research Bureau

10 Aug 2007

With interest rates rising in six steps from 10.5-11 per cent to 15.5-16.5 per cent in the past year, automobile finance companies have started losing business the share of purchases backed by loans has shrunk from 80 to 73 per cent. 


Customers who still want to go in for a loan are opting either for longer maturity plans or making higher upfront payments to control their monthly outgo on loan repayments. 


"Customers have increased their down payment from 10 per cent to 40 per cent," said Ashok Khanna, head of auto finance at HDFC Bank, which has a 30 per cent share of the country's automobile loan market. 


This could impact automobile sales in the current quarter (April-June 2007). Sales growth is expected to fall to below 10 per cent in the current financial year from 24 per cent in 2006-07. N R Narayanan, head of car finance at ICICI Bank, told Business Standard, "The growth in sales might fall to a more realistic 10-12 per cent in 2007-08." 


Experts said higher interest rates would have a bigger impact on large players like Maruti Udyog, Hyundai India and Tata Motors, which have a higher share of cars bought on loans. 


"As these companies rely on the volume game, the pressure on numbers can impact their revenues as well as profits,", said PricewaterhouseCoopers analyst Abdul Majeed. 


Customers are also dumping automobile finance companies for public sector banks that are offering loans at interest rates that are two percentage points lower. The share of nationalised banks in automobile finance is learnt to have gone up to 25 per cent from 3 per cent in the last one year. 


"Customers opt for nationalised banks because of the lower interest rate they offer, though the paper work involved is more," said Rajiv Sawhney, a Maruti dealer. 


Taking the cue from this shift, Maruti has opened negotiations with rural banks to consolidate its sales, while Hyundai has tied up with public sector banks like the State Bank of India and the Punjab National Bank, as well as co-operative banks. 


Arvind Saxena, vice-president (marketing and sales), Hyundai, said, "The increase in the rate of interest would surely impact sales.We are working out strategies to decrease the loan interest burden on customers and maintain steady sales." 

(Courtesy: Business Standard)