Banks come up with innovative schemes to boost car loans

There has been considerable downfall in the car sales because of high prices of raw materials and inflation. Even the interest rates have gone up so there are only few takers of car loan india. The auto financers have started coming up with innovative schemes to boost sales. Lenders are making all their efforts of resorting to lower interest rates, floating rate loans and cutting dealer commissions to increase demand.



Recently two of the largest players in car financing have decided to cut down interest rates by 2% to step up the demand. For this the commission paid by the bank to the automobile dealers has been reduced therefore retaining the rates at a level which makes it affordable to buyers.


HDFC Bank and Kotak Mahindra, both figures among the top three financiers of four wheelers, will be reducing their rack rates by 2%. Kotak Mahindra Prime at present is charging an interest rate of close to 16%, which will now be brought down to 14%.



According to HDFC Bank official’s bank will be bringing down its rates from 14.75-15.5% to 12.8-14.16% depending on the tenure of the loan. Currently lender is giving a commission nearing to 5% to the dealer. Dealers, in turn, used to pass on part of this commission to customers. Thus, the final rates to customers would be 13.75-15%.

Interest rates for car loans have gone up by close to 1.5-2% this year, impacting sales. In July, for the first time, sales of four-wheelers fell for the first time in absolute terms. Sales growth has been decelerating since April.

“The move will help the industry. Earlier, the payouts were as high as 500 bps. It will be now capped at 200. The payout reductions will be passed on to the customer. We will try and come out with new rates next week. The move would also make the portfolio safer. When the payout was 4-5%, dealers used to pass on some of his subventions to fund the margin requirements of customers,” says Kotak Mahindra Prime CEO Sumit Bali.

Adds HDFC Bank EVP Ashok Khanna, “Not all dealers were passing on commissions to the customers. In bigger cities, dealers may pass on more commissions, but in smaller cities, that was not the case. Moving forward, the move would bring in more transparency, as the customer will be more aware of the rates.”



Financers feared that higher interest rates might leave the lenders with the wrong type of customers. In other words, default would be higher if the financers were to sign up buyers who were willing to pay such high rates.


Apart from this Axis Bank, has also reduced dealer commissions, will not be lowering interest rates now, said a senior bank official. From now dealers will be passing around only 1% of the commission to the customer.

Besides from reducing the interest rate as planned by some financiers, ICICI Bank has plans to launch a floating rate product in the next one week to ten days. Kotak Mahindra is also working on similar product, although it has not yet finalized the date.

As per sources earlier this year ICICI, had discontinued its car and commercial vehicle floating rate product is now planning to re-launch a big-ticket supported by aggressive plans of migrating its entire car loan business to floating rate.

“Earlier, only about 2% of customers opted for this product which was offered as an additional option. The lack of demand prompted ICICI to roll it back. But now, with the uncertainty in the rate regime, the product will be relaunched and ICICI will try to increase the ratio of floating auto loans to 100%,” said a top executive with an auto financing firm.

As per sources ICICI is planning to offer a range based on the FRR (floating reference rate) used for its retail products. The FRR would be revised every quarter, depending on the change in the rate regime. HDFC Bank officials are of opinion that that they will not be going for a floating rate as this will make loans steeper.

“It is not in the customer’s interest. Rather we are looking at making the loans more affordable for customers,” said a senior HDFC official. Nevertheless, the latest move taken by the financiers to cut commissions has led to an uproar among car dealers, who play a vital role in the system, as most of the loans come from them.

When ET spoke to the dealers most of them expressed their unhappiness on this new change done by the lenders. In fact dealers are having trouble as these days car sales have been gone down and margins are under pressure.

Gautam Modi of Modi Hyundai, a Mumbai-based dealer said, “Even when the dealer commission (payout) was 5%, we retained only 1%. So, it is not going to be any different now. We will continue to retain 1% as there is stiff competition among car manufacturers and dealers.” While some other dealers avoided to comment on this comments saying that it is a sensitive issue.

At present HDFC Bank is the largest car financier with its monthly disbursements closing to Rs 900 crore. ICICI Bank, which used to be the market leader till a few months back, has come down to second position with disbursements at around Rs 600 crore.

While Kotak Mahindra Prime’s disbursement is close to Rs 250-275 crore. Manufacturers are expecting boost in sales with the cut in rates due to which in the past few months the sales had come down.