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Gear up for dearer vehicle loans

Going for a new car or two-wheeler is to become more costly from next week as major lenders in the auto loan segment to hike rates

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Banks set to hike rates by 50 basis points

Going for that new car or two-wheeler is likely to become slightly more costly from next week as major lenders in the auto loan segment are likely to hike rates by at least 50 basis points. This follows the 25 basis point hike in the repo rate by the Reserve Bank of India last week.

Though auto loans were not specifically mentioned in the monetary policy, banks are gearing up to pass on the burden of increased cost of funds to their customers.

“Loans rates might go up by 50-100 basis points in the next one week,” said N R Narayanan, car and commercial vehicle loans, ICICI Bank, the biggest player in the auto loan market.

Other banks like State Bank of India and Centurion Bank of Punjab also agree that auto loan rates are on their way up. “Generally it is expected that auto loan rates will go up by 50 basis points, mainly owing to the higher borrowing costs.

The higher provisioning costs will also force banks to raise rates,” said a senior official from the State Bank of India.
The RBI has also increased loss provisions for unsecured sectors such as personal loans and credit cards. Banks are likely to pass on the increased cost to the customer in accordance with the RBI signal that money is becoming expensive.

Pressure on banks from auto companies to release more funds in the last quarter of the year may also force them to raise rates.

Besides banks, non-banking finance companies are also major players in the auto loan market and the pressure on NBFCs to raise rates is even more intense.

The RBI has also raised the risk weightage on non-deposit taking NBFCs and hiked banks’ loss provisioning for financing them.

But NBFCs, which have seen their auto loan market being snatched away by banks, are more cautious. They are possibly waiting for the banks to make the move first and are also keeping an eye on the union budget later this month.

“Probably rates may go up but we have to see what the budget has to offer,” said Ganesan A K, AGM, Sundaram Finance. However, both banks as well as NBFCs are confident that loan growth in the sector will not slow, despite this hike which will be the second in two months. Auto loan rates were hiked by 50 basis points, in January.

“A rate hike will not dissuade people from buy cars and two-wheelers. A 50 bps hike will spike the EMI by only Rs 48 for a one lakh loan,” said Narayanan.

Bankers also argue that auto loan rates are still low and there is scope for more hikes. “The interest rate threshold for a car loan is 18% whereas rates are now at 12-13%.

Similarly the threshold for two-wheeler loans is 24% but rates are now hovering at around 20%,” said Harpreet Singh, business director, wealth management distribution and loans, Centurion Bank of Punjab.

But not all are convinced about raising rates. Some NBFCs and banks are ready to take the losses for now because rates were hiked recently and prices of vehicles have also been raised. “Normally we try to absorb a 50 bps to 1% increase in rates,” said Ramesh Iyer, managing director, Mahindra Finance.

HDFC Bank also said it does not have any plans of raising rates very soon. “There has been tremendous pressure from manufacturers to release more funds for financing, but right now we are comfortable,” said Ashok Khanna, executive vice president, and business head, HDFC Bank.

A mixed bag

ICICI Bank, SBI and Centurion Bank of Punjab set to hike rates

Mahindra Finance and HDFC Bank do not have such plans

The RBI had hiked the repo rate by 25 bps, making funds dearer

It had also sought more provisioning for some loans

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