The Hindu Business Line : Two-wheeler sales skid on interest rate hike

About 78 lakh two-wheelers got sold in India last fiscal (2006-07). The first six months of this fiscal have seen a 9.5 per cent drop in two wheeler sales. If this trend continues, there will be only about 70 lakh two-wheelers sold this year. That would mark a reversal after six years of steady growth of about 12 per cent annually.

HIGH INTEREST RATES

Top officials of two-wheeler giants such as TVS Motors and Bajaj Auto have been quoted as saying that credit squeeze by banks and high lending rates are among the major reasons for the slowdown in sales. Banks lend about Rs 15,000 crore to the two-wheeler borrower. They finance half the total two-wheeler sales in the country.

Two-wheeler loans are now priced at rates of about 21 per cent per annum compared to about 17 per cent per annum last year.

Why are rates so high in this segment and why did they go up further?

Bankers say the operational costs associated with two-wheeler loans (in terms of expenses on documentation, collection and recoveries as a percentage of the loan amount) are high. Besides, the risk profile of the average borrower in this segment is higher and bankers need to charge higher rates to compensate for this.

DEFAULT RATES UP

Interest rates went up by another 4 percentage points during the course of the last year because defaults started increasing. Default rates, which are normally around 2 per cent to 3per cent, increased to about 5 per cent, according to Mr Harpreet Singh, Head-Branch Banking, Centurion Bank of Punjab, a significant financier in this industry.

Slow lending

That forced banks to go slow in lending, he says. “We were forced to close down some lending locations – especially on the outskirts of urban centres and rural pockets. The cost of collection in these areas increased,” Mr Harpreet said.

Mr N.R. Narayanan, Head-Vehicle Loans, ICICI Bank, which has a 40 per cent market share in this segment, said, “We have only stopped lending in certain geographies — and that has nothing to do with funding two-wheelers alone. These areas exhibit poor repayment behaviour — and so we are going slow in funding all products in those areas.”

So, do banks take responsibility for the slowdown in this segment? Not really.

Mr Narayanan, points out in defence of banks, “The average ticket size of a two-wheeler loan is only around Rs 35,000. Even if there is an increase in rate of interest by a couple of percentage points, it will not make much of a difference to the buyer. The equated monthly instalment (EMI) would only go up by about Rs 100.”

So, why then is the buyer defaulting?

Affordability

Mr Harpreet explains, “While the impact on EMI may not be high, even absolute affordability is an issue. Incomes and salaries of this group (two-wheeler users) have not increased while cost of living (rentals, groceries, petrol, maintenance costs) has gone up sharply. Their disposable income has come down since rates in other segments have gone up. And they are not replacing their vehicles as they used to.”

Everything generally looks up around the festival season. With another season just upon us, is an upturn likely? Mr Harpreet sounds a note of caution – “I don’t think this is a short-term problem. When the delinquencies began in late 2006, we thought it was a blip and a temporary phenomenon. The problem is deep-rooted.”

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