Banks fear more defaults and pass on cost to customer

Already the automobile companies are fighting with impact of high interest rates on sales. The companies have been working on different strategies and making way out to increase their sales. A further hike in interest rates by banks and lending institutions on loans for cars and two-wheelers is on the cards and this is going to add to their woes.

ICICI Bank, the largest player in the vehicle loans segment, has already gone ahead and has hiked interest rates on two-wheeler loans between 100 and 200 basis points and on cars between 25 and 50 basis points. This move will have direct impact on other banks like HDFC and Kotak to follow suit.

A cross-section of banking officials informed that the banks are taking this step in view to the stricter regulations on recoveries of auto loans imposed by the Reserve Bank of India that is compelling banks towards such a move. As a result, banks expect higher default rates for which they would like to pass on the cost to customers.

“Tightening of norms on collection is going to show stress on the quality of the retail assets portfolio. In the fear of a deteriorating portfolio, banks are trying to find ways and means to fight the tight control on the collection mechanism. This might force banks to hike rates,” said Mr Rajan Pental, Senior Vice President, Auto Loans, HDFC Bank.

Mr Udit Bagga, who has dealerships for two-wheelers and Maruti Suzuki cars, said, “ICICI has hiked interest rates on two-wheeler loans by one and one-and-a-half percentage points and on cars by half a percentage point. However, UTI has reduced it by 0.25 percentage points on cars.”

For car makers, it would be more challenging to push their sales as the hike would add on to the increase in interest rates that the industry has seen in the current year.

“A hike in interest rates always affects sales. While half a percentage point in itself is not a big jump, if one sees the cumulative hike that has happened over the previous months, it will have an impact,” said Mr Jnaneshwar Sen, Senior General Manager, Honda Siel Cars India.