NEWS & ADVICE : CAR LOANS
Car loans to increase by 1 percent
By Vaibhav Aggarwal
Jun 27, 2008
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If insiders are to be believed, then the decision taken by the RBI on Tuesday will adversely affect the auto loans industry. The dual hike in key rates as announced by the RBI, will hike the auto loans by a minimum of 5000 Rs. a month, on a car loan of Rs 3 lakh for a period of three years.

Most of the major banks are planning to hike interest rates on auto loans by 100 basis points, in response to the repo rate and CRR hike. Leading banks had increased the interest rate on auto loans by 25-50 basis points in May. Consequently, after the two close hikes, interest rate on auto loan is expected to go up from 13.75% to 14.25% in April to 14.75 to 15.25%, with effect from July 1.

Sumit Bali, CEO, Kotak Mahindra, said, “There are several factors that are acting against the auto industry. The overall sentiment is low and people are staying away from leveraging on investments. As a result, there might be a slow down in demand in the short term.”

Saying that banks might not be content with a half percentage point increase for auto loan, an official of a leading bank said, “Banks would be forced to increase interest rates by more than 50 basis points as the simultaneous increase in CRR will increase the overall cost of funds.”

When financed, a Rs 3 lakh Maruti Alto or Hyundai Santro, would you around Rs 5,400 more. While an Rs 5 lakh Maruti Swift or Tata Indigo will come at an additional cost of around Rs 9,000, an Rs 8 lakh Maruti SX4 or Honda City will cost you an additional Rs 14,000.

“The recent move by RBI will adversely impact the auto finance industry. The bank is evaluating the impact and will shortly decide on the quantum that has to be passed on to the customers,” says Rajan Pental, auto finance head, HDFC Bank.

However, Bali is optimistic about the auto industry’s chances of surviving this present bout of inflation. According to Bali, if given the present conditions, the core economy continues to do well and the GDP grows at 7.5% to 8%, then there would still be more disposable income in the hands of the consumers. This, he feels, would revive the sentiments of the buyers. Consequently, he expects the auto industry to grow at 8-10%.

The Reserve Bank of India had on Tuesday, increased the repo rate or the key lending rate by half a percentage point to 8.5% and the cash reserve ratio by 25 basis points to 8.75% in two stages. The bank's move is prompted by the need to control inflation that touched a 13-year high of 11.05% for the week ended June11.


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