The Hindu Business Line : Truckers lukewarm to floating rates

New Delhi/Chennai, May 19 Truck operators have given a lukewarm response to the floating interest rates offered by ICICI Bank, the second largest player in the vehicle financing business. The bank had introduced this product about seven months ago.

A steady rise in interest rates over the last few months is partly responsible. Last year, auto loans got revised almost on four- five occasions as against the normal practice of changing once or twice a year.

“Ever since we introduced it seven months ago, interest rates have only been moving up. So it was not the right time to introduce the product. Had we introduced it two years ago, then may be it would have made sense,” said an ICICI Bank official.

The official said the bank had refrained from pushing the product as it would have led to dissatisfaction among the buyers.

It is not entirely surprising that the product has failed to take off. Other lenders to the commercial vehicles industry such as Sundaram Finance had tried a variant of this product more than 15 years ago. According to Mr Srinivas Acharya, Deputy Managing Director, Sundaram Finance, “We had an interest rate variation clause during 1992-93 and it worked both ways — both for reduction and increase —, but we had to withdraw this due to overall non acceptance by the market.”

When asked about the reception for such products, Mr R. Sridhar, Managing Director, Shriram Transport Finance Company, the leading NBFC in this segment, says, “Shriram Transport is financing small truck owners who are unbankable. Hence, they do not understand terms like PLR, CRR, repo etc., Therefore, introducing floating rate of interest for our customers is very difficult. Since the understanding is very low, the reception for such a proposal will be very low.”

So, if customers are not receptive to such products, how do lenders insulate themselves from volatility in interest rates?

Mr Acharya answers: “We try to restrict the repayment period to 3 years generally, 4 years in some cases, but 5 years in rare cases. While it is not very difficult to take interest rate risk over a 3-year period, it is risky over a 4-year period. Our treasury monitors our asset-liability mismatch very closely to manage the risk.”

Mr Sridhar says that there was no problem till a few years ago since interest rates were coming down. He says, “In the last 2 to 3 years, interest rates have started moving up and thanks to high growth of assets under management during this period, all the companies were able to manage even though all their loans were executed with fixed rate of interest.”

So is the market still not ripe for this product? Mr Acharya points out that the housing finance market has more or less accepted the interest rate variation, but the truck finance industry has a long way to go.

Mr Sridhar thinks that in the case of housing finance, all lenders follow the practice and there is uniformity in the entire industry. “Besides home loan borrowers, most of them bankable are able to understand the impact of fixed and floating rate of interest,” he says.

He has an interesting comparison to make. He says, “Like we observed recently in derivative transactions, customers feel happy when they get profit and may get into dispute when they end up losing. The same thing will happen if floating rate of interest is introduced in commercial vehicle industry.”

That’s a caution for lenders. And it may well mean that it is going to be only fixed rates for the commercial vehicles for the foreseeable future!

More Stories on : HCV/LCV/Tractors | Credit Market | Interest Rates

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