Cheaper auto loans to push sales

The auto industry has received a welcome shot in the arm with a drop in interest rates on vehicle loans expected over the next few days. This is expected to help offset the rise in model prices after the Budget last month increased excise duties by a minimum of 2 per cent. This follows the reduction of the interest rate (for lending to banks) by the Reserve Bank of India by 50 bps to 8 per cent on Tuesday, a move which has come after almost three years of successive hikes. After a tough previous fiscal, such a move is expected to boost sales, of which 70-80 per cent comes from financing alone. Mr V. Lakshmi Narasimhan, CFO, Magma Fincorp, told Business Line that this was a “dramatic intervention”, as the industry had expected a lower rate cut at about 25 bps. A non-banking financer, Magma lends for commercial vehicle, construction equipment, tractor and car purchases. “We expect banks to drop lending rates in the next 2-3 days, after which we will follow. Our average lending rate is 14.6 per cent, which may go down by a similar 50 bps,” he said. To check inflation, interest rates have gone up 13 times in the last year. The RBI had then indicated in September, 2011 that it might be reduced going forward, in order to spur GDP growth. Industry sources also feel that lower interest rates may be part of a larger package and be followed in tandem by a reduction in the fuel subsidy on diesel by the Government. Such a reduction, leading to higher diesel pricing, is expected to impact commercial vehicle sales. Mr Ajay Seth, Maruti Suzuki's CFO, said the RBI's move will help bring “lost confidence back” in the car market, but more rate cuts are needed to maintain the growth trajectory. “Only one cut won't suffice. One would have to look at a six month or a year long period, I'd expect up to a 250 bps cut this fiscal,” he said. Added Mr Vishnu Mathur, Director-General of Society of Indian Automobile Manufacturers, “It seems the Government is prioritising on industrial growth. We expect a normalising of interest rates over the year, which is better for market sentiments.”