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S. Muralidhar

A STAGNANT automobile market and falling interest rates have had the maximum impact on the car finance market. Now that the 2001-02 fiscal has ended, the financing market merits a relook to gauge the effect of financing on car sales.

The auto finance market was very active in 2001-02, with over 70 per cent of cars sold being financed. In fact, industry sources attribute this success of auto companies to the effectiveness of their alliances with financing institutions. These institutions believe that car-makers owe much of their sales to innovative consumer finance.

Mature market is good: The car finance market has reached a new level of maturity, so much so that the car-maker, the automobile dealer and the financier now work together to provide better features and funding options for the buyer. Here again, the flexibility of operations among non-banking finance companies (NBFCs) indicates they have been in the forefront of this new trend.

On the contrary, banks are hamstrung by the rigid lending regulations and inflexible operations. Their rates are, consequently, higher. However, thanks to increased operational efficiencies, a few private sector banks, such as HDFC Bank and ICICI Bank, have managed to make a dent in the car finance market this year.

Benefits from the trio: The coordinated efforts by the manufacturer-dealer-financier trio have also enabled them offer better rates to the car buyer. Depending on the manufacturer, tenure of the loan and credit history of the car buyer, interest rates, on a reducing balance basis, now hover in the 10-13.5 per cent range for new cars compared to 13-16.5 per cent till early last year. For old cars, the interest rates continue to be in the 16-18 per cent range. The interest rates also differ between various car models of the same manufacturer, depending on the model the company wants to promote.

Behind attractive rates: The attractive rates of interest most NBFCs are able to offer are because they operate on a `rack rate' system. This system is arrived at when the financing company negotiates with different car manufacturers and local car dealers to squeeze out the maximum discounts from them. This is why dealer-level direct discounts to customers are almost non-existent now on most car models.

These discounts from the manufacturer and dealer — also called the `subvention amount' — are then absorbed by the financier helping him offer the best interest rates. Though the official lending rates fluctuate in the 14-16 per cent range, the trio ensures the loan to the consumers at a much lower rate. Some car companies, such as Maruti Udyog Ltd (MUL) and Hyundai Motor India Ltd (HMIL), have entered into preferred financing arrangements with a few banks and NBFCs. These institutions, in turn, offer lower interest rates. Manufacturers with `preferred financing arrangements' offer additional discounts to the financier for the sales promotion of their products. This discount helps the financier provide consumers with a lower rate of interest.

Faced with mounting competition from NBFCs, some MNC banks have also started absorbing the subvention amount from the dealers who, in turn, either pass on a manufacturer discount or a part of their margin, so that the buyer gets a more reasonable rate of interest. However, other banks, particularly public sector banks, are still hesitant to do this. As a result, their rates are not competitive. Again, while most MNC and private sector banks operate through direct selling agents who have considerable margins to allow negotiations with customers, public sector banks mostly operate directly with the car buyer.

A car buyer can attempt to negotiate the subvention amount as a direct discount from the manufacturer or dealer. But the amount will always be lesser than that paid to the financier. The discount from the manufacturer is, in most cases, paid directly to the financiers and not to the consumers. In some cases, the dealer offers a combination of a partial discount and/or free accessories. However, in such a situation, the car buyer cannot expect to get a lower interest rate on the financed amount.

Direct discounts unattractive: The trend of an increased alliance between the trio was more pronounced in 2001-02, because of the increased pressure on car sales as a result of low consumer confidence. Manufacturers also discovered that direct discounts to the car buyer did not result in increased sales. However, consumers who expected that confidence levels would improve in the future, were comfortable getting their cars financed. Attractive interest rates just aided the process.

The increased preference for financing car purchases through loans, thus, seems justified. In 2001-02, but for the much-awaited launch of the Fiat Palio, there were no major new introductions in the volumes-driven B-segment, or even in the entry-level C-segment. This means the manufacturers witnessed the inevitable wearing off of the novelty value on many of their two-three-year-old cars. MUL, HMIL, Ford India and General Motors India, however, managed to improve their performance, thanks to innovative financing.

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