The wait for your dream car may have just got longer. Not because fewer cars are rolling out of assembly lines but because the country's top banks are becoming warier about granting loans for cars. The banks say they are not keen on exposing themselves in the auto loans segment due to ever-increasing defaults which leads to high NPAs on their balance sheets. So they are becoming careful in choosing whom they extend loans to and hiking salary slabs to ensure that only those with the ability to repay get the funds in the first place. "The auto sector is not doing well, owing to a variety of reasons. We are not really aggressive on the segment and would prefer to keep our exposure to less than `1,000 crore," says M Narendra, CMD, Indian Overseas Bank.
Plagued by high vehicle finance rates—in the range of 10.45 to 16.50 per cent—high inflation and rising fuel prices, the auto industry's growth is muted and consumer sentiment, negative. So far, the sector has been a non-performer with domestic car sales declining for nine months in a row (till July 2013).
"The rise in fuel prices by `3-`5 every month, falling disposable incomes and currency fluctuation will drag car sales further down. With more than 40 per cent of the components being imported, cars are set to be costlier, which in turn will dent sales," says BA Prabhakar, who recently retired from the post of CMD at Andhra Bank.
The sector put up a lacklustre performance last year too. According to the Society of Indian Automobile Manufacturers (SIAM), total vehicle sales in 2012-13 stood at 17.8 million units, up from 17.3 million units in 2011-12. Passenger car sales in 2012-13 stood at 1.89 million units, compared to 2 million units in the previous fiscal. This was the first annual decline since 2002-03, when car sales dropped by 2.09 per cent.
In 2011-12, total sales stood at over 20.1 million units against 19.7 million units in 2010-11. According to the Automotive Component Manufacturers' Association of India, production of passenger vehicles stood at 3.23 million in 2012-13, while passenger car sales stood at 1.89 million units.
While dipping sales concern auto makers, banks are worried about increasing defaults. As per data provided by NPASource.com, the gross non-performing assets (NPA) of public sector banks rose to `1.76 lakh crore on June 30, 2013 from `1.55 lakh crore on March 31, 2013. Sources say auto loan defaults account for 7-8 per cent of the total NPA, and are rising. Perhaps it was with this in mind that SBI recently tightened its lending norms for car loans. It raised the loan eligibility limit for the salaried class from `2.5 lakh per annum to `6 lakh per annum for non-SBI account holders. For account holders, the limit has been raised to `4.5 lakh per annum. The bank also increased its processing fee by 0.51 per cent.
"It was an attempt to de-risk our auto loan portfolio and make the loan policy norms robust. Considering the increase in fuel and diesel prices, the high inflation and rising cost of four wheelers, we wanted to alter the income paying capacity of individuals, as the effective monthly instalments has been steadily rising," says A Krishna Kumar, MD, SBI. He, however, added that the gross NPAs for auto loans stands at 1-1.2 per cent and hence is not really alarming.
Still, this is the second time in two years that SBI has increased its eligibility limit. In January 2012, the bank raised its eligibility limit for the salaried class from `1 lakh per annum to `2.5 lakh per annum.
Typically, the loan limit is up to four times an individual's annual income, but SBI and all other banks employ a cautious strategy and offer a maximum of 85 per cent of the vehicle value. SBI's car loans are one of cheapest at 10.75 per cent interest and come with a zero prepayment charge. As a result, the bank's car loan portfolio touched `26,411 crore in June 2013, up from `19,040 crore a year ago. For the country's largest bank, auto loans account for nearly 3 per cent of total advances and are the second-largest component of the retail portfolio after home loans.
State Bank is the country's second-largest car financier after HDFC and commands a 25 per cent share of the market. Its change in lending norms is bound to affect passenger car sales, say industry experts. According to AK Gupta, executive director, Canara Bank, though other bankers are unlikely to follow suit, small traders and working class borrowers from rural areas will be affected by the SBI move as they may no longer be eligible for a loan. "The move may be on account of a fear of increasing defaults as the disposable income of potential entry-level car buyers is hit by inflation," says MV Tanksale, ex-CMD, Central Bank of India.
Expressing disappointment, P Balendran, vice-president, General Motors India, says "The rate hike is unexpected. This is a major jolt for the automotive industry. We were expecting marginal growth in sales in the festive season due to a good monsoon but now that looks challenging."
