Banks bring in floating interest car loans to beat the slump
By Vaibhav Aggarwal
Sep 7, 2007
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New Delhi: Auto sales have plunged drastically due to the prevailing high interest rates. During the first five months of this fiscal, the passenger car segment has had a single digit growth rate, the two wheeler sales are down by 10% and the commercial vehicles sales have got the maximubm beating.

To reduce this impact and improve sales, banks and finance companies have decided to offer floating rate auto loans in India. Based on customer feedback and persistent demands from car companies, the leading banks and finance companies are all set to launch floating rate car loan schemes from this month.

NR Narayanan. ICICI Bank auto loans head said “Customers wanted to hedge the benefits of any changes in interest rates. They had been demanding floating-rate schemes similar to home loans. Now we are offering them the option to take floating interest rates schemes on all kind of cars right from Maruti-800 to luxury marquees like BMW and Mercedes.”

By adopting a floating interest regime on auto loans, customers can get the benefit if the interest rates come down, which is likely to happen in the medium term. Of course, the sad part with floating interest rates is that if monetary conditions tighten further, auto loan borrowers will have to pay more.

From September 1, ICICI Bank, the market leader in auto loans, is offering floating interest rates on different finance packages.“With the general perception of interest rates moving southwards, the floating rates option will bring in more customers. As a discount option, we are offering floating rates at 50 basis point lower than fixed rates to lure customers,” Mr. Narayanan added.

The floating rate option is expected to expand the current auto loan market by 5% in the next two to three months. Coinciding with the festive season, the demand for new car loans is likely to increase in the next few months. Banks and finance companies are looking to add around 5,000 cars to their monthly sales tally.

The interest rates which were 8-9 percent last year have increased to 14%. This has led to a slump in car purchases, with most of the leading car manufacturers reporting a drop in sales, during the first five months of this fiscal. Maruti Suzuki has been the only exception.

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