Interest rate hike and mounting inflation has put the brakes on the speeding auto financing industry in the country. Bad times be damned!
India is undergoing unprecedented change and auto financing is no exception. Earlier 80-85% of auto financing was undertaken by the banks and financial institutions, but with rising interest rates and higher disposable income, more people are opting for an outright purchase using their savings. This seems to be logical to some extent as auto loans are costlier today by 2-2.5% since the beginning of the year. This implies that an auto loan of Rs.5 lakhs for a three year period will get expensive by a further Rs.10,000. And as lenders still account for 70% of auto financing, a rise in interest rates, which subsequently implies a hike in EMI instalments further aggravates the problem, thus leaving the buyer confused! “The high interest rate is very negative for the auto industry,” asserts S. Ramnath, Analyst, SSKI to B&E. However interestingly even in such a scenario there is some good news. As for auto loans (for new car) fall, an increase in sales of second hand cars is bound to happen.
However, auto financiers are on their toes to increase their profit margins. While, a few have shut their financing operations, others are now approaching customers directly instead of routing through intermediaries. Certainly, the economic activity (the high interest rate & burgeoning inflation) has had a knock-down effect and unless these are resolved, the predicament will continue to haunt the auto industry. Screech... Heard those giant brakes?!
India is undergoing unprecedented change and auto financing is no exception. Earlier 80-85% of auto financing was undertaken by the banks and financial institutions, but with rising interest rates and higher disposable income, more people are opting for an outright purchase using their savings. This seems to be logical to some extent as auto loans are costlier today by 2-2.5% since the beginning of the year. This implies that an auto loan of Rs.5 lakhs for a three year period will get expensive by a further Rs.10,000. And as lenders still account for 70% of auto financing, a rise in interest rates, which subsequently implies a hike in EMI instalments further aggravates the problem, thus leaving the buyer confused! “The high interest rate is very negative for the auto industry,” asserts S. Ramnath, Analyst, SSKI to B&E. However interestingly even in such a scenario there is some good news. As for auto loans (for new car) fall, an increase in sales of second hand cars is bound to happen.
However, auto financiers are on their toes to increase their profit margins. While, a few have shut their financing operations, others are now approaching customers directly instead of routing through intermediaries. Certainly, the economic activity (the high interest rate & burgeoning inflation) has had a knock-down effect and unless these are resolved, the predicament will continue to haunt the auto industry. Screech... Heard those giant brakes?!
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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