PUNE - A slowdown in vehicle sales in India, which has knocked shares of firms like Tata Motors and Maruti Udyog, will persist unless interest rates fall 100-150 basis points, a senior banker said on Friday.
“The desire for cars is still strong, but demand for credit has come down,” said N.R. Narayanan, head of vehicle finance at ICICI Bank, India’s top private bank.
India’s central bank has raised interest rates five times since June last year, making loans for automobiles more costly and hitting sales. Some 80-85 percent of vehicles sold in India are bought with loans.
He said interest rates on vehicle loans had risen 300-350 basis points over the year. Current rates on vehicles are about 13-14 percent.
“Until interest rates drop by 100-150 basis points, the demand situation won’t improve,” he said at the launch of a finance scheme for Mercedes-Benz cars.
“If interest rates go beyond 16-17 percent, that’s when stress will come in.”
Tata Motors, the country’s top bus and truck maker, reported a 6.6 percent fall in sales in July, its third straight month of contracting sales.
Its shares have fallen 27 percent this year, while those of Maruti Udyog, India’s top car maker, are down 8.3 percent.
The company, majority owned by Suzuki Motor Corp., reported strong growth in sales but its managing director, Jagdish Khattar, said last month that it would be hard to match last year’s record sales in the current interest rate climate.
Narayanan said buyers of cars had higher disposable income than buyers of motorbikes and could absorb higher interest rates up to a certain limit, but the flexibility of buyers of entry-level cars was more limited.
He said the monthly loan repayment for motorcycles was relatively small, but potential buyers now faced higher daily expenditure as a result of inflation and were paying more interest on home loans.
“So the household budget is being affected, which makes him think: do I really have to buy a bike now?”
Vehicle makers have scaled back output and top bike maker Hero Honda Motors Ltd. has delayed start of production at a new plant on account of softer demand.
Still, new launches and higher disposable incomes on the back of strong economic growth are expected to nearly double annual passenger vehicle sales to 2 million units by 2010.
“This slowdown is more a blip than a long-term slowdown,” said Narayanan, who estimates vehicle finance makes up 18-20 percent of ICICI Bank’s overall loan portfolio.
The scheme for Mercedes-Benz cars, which offers low monthly instalments of 29,999 rupees ($744) or low down-payments for a C-Class sedan, will bring in more consumers who will find the option makes the premium cars more affordable, he said.
A similar scheme for BMW cars has had huge success, he said.