The Hindu Business Line : 7-year auto loan: Analysts wary of its long life

THE 7-year auto loan scheme has found instant success with first time car and two-wheeler customers. But auto analysts are sounding a note of caution.

"It is early days yet and both the customers as well as the finance companies should exercise caution," warns Mr Palle Nagi, an auto analyst with AT Kearney.

ICICI Bank and State Bank of India and its associate banks were among the few to offer the scheme hoping to cash in on falling interest rates and increasing demand for four wheelers. The scheme offers an EMI (equated monthly instalment) for as low as Rs 2,599 for a seven-year tenure at a down payment depending upon the customer's purse.

Mr Nagi said customers could find themselves in a situation where the loan value does not match the depreciation value of the car. "If the low EMI is the driver then the customers have to be aware of the economic implications when they want to turn the car in before the loan matures," he said.

For example, certain models launched merely a year back have seen their prices dropping by almost half. If the customers who took these cars through finance, were to turn them in to upgrade to a newer model, they could find that the depreciation value would be far lower than what they had perceived when they bought the car.

Hence, to buy a new model, they would have to fork out a much larger amount of money after closing the existing loan.

"Such longer tenure schemes carry a lot of risk for the finance companies," the Kotak Mahindra Primus Ltd's Executive director for car finance, Mr Pankaj Desai, told Business Line. He said finance companies prefer those customers who opt for shorter tenures because the defaults are lesser. Hence, its pie in the overall auto loan portfolio is less than 5 per cent.

But Mr Sachin Khandelwal, the car loan product head for ICICI Bank, differs on this issue.

"The seven-year EMI scheme is picking up largely because of the extremely low EMI. Certain models have high resale value and hence its customers need not worry when they turn their cars in," Mr Khandelwal said.

He, however, admitted that a certain number of customers shy away from such schemes because the total outgo for such a long tenure is much higher than the total amount from a shorter tenure. He said even though the scheme was launched over a year ago, the bank started promoting it actively only during the last six months.

An official with State Bank of Mysore, the associate bank of SBI, said that with the introduction of this scheme, there has been a five-fold increase in disbursal of auto loans from the bank.

Mr Nagi, however, said India could face the same problem the US auto sector is finding itself in. To maintain share in the market, auto manufacturers in the US have pegged the monthly payment to the same level while increasing the terms of the loans.

This has lead to a situation where in the retail customers who opt for such a scheme take a longer time to build equity on their vehicle. Not only do the automakers have to provide for more assistance in terms of service through their dealers but the finance companies also face the risk of defaults. Hence, the analyst suggests that the customers should opt for a tenure where the loan value at any given period is more or less equivalent to the depreciation value. But with prices of cars reducing every year, it would be tough for the customers to strike the right balance.

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