Banks’ 100% finance for cars trigger bad loan fears – Economic Times

MUMBAI: Hit by poor loan demand from corporates, some private banks now offer 100% financing for cars, a move that may help the car market to rebound but has also been criticised for risking a surge in bad loans. Banks such as Axis Bank and HDFC Bank give 100% financing for cars while Kotak Mahindra Bank gives 95% finance to cars. Some banks also fund the car insurance cost, industry insiders said.

While it may be good for consumers and carmakers, it’s a risky business for banks because of 100% loan-to-value ratio, which is loan you owe in relation to how much the asset is worth. Ideally, the value of the asset for which the loan is given should be higher than the loan outstanding. That is not the case here. “This is the same madness we had seen in the home loan market where banks gave 100% loans to home borrowers.

They also gave additional funding for furnishing homes,” said Romesh Sobti, managing director and CEO at IndusInd Bank. “This lead to the subprime crisis when property prices crashed. In the auto loan market also, 100% financing could lead to a bubble,” he said. IndusInd Bank offers up to 75% financing for cars. “The loan-to-value ratio should be such that the borrower should have put in some equity,” Sobti said. Email queries sent to Axis Bank, HDFC Bank and ICICI Bank did not elicit any response at the time of going to press. Banks are facing competition from captive finance companies of various automobile companies that offer up to 100% financing and freebies. Banks also compete with each other and undercut competition to get business.

“Banks give 90% finance to customers for buying of cars. However, to cut competition and gain market share, we stretch up to 95%. Banks also run schemes with dealers where they give 100% finance on certain models and also fund the insurance cost which is then bundled in the EMI,” said the direct sales agent of a private sector bank. Banks give 100% finance on cars like Maruti Swift Desire, Wagon R, Maruti Alto, Ford Ecosport, Nissan Terrano and Renault Duster. This offer is for customers with income of over Rs1 lakh, the sales agent said.

Shinjini Kumar, director at PriceWaterhouseCoopers, pointed out that auto finance does not work the same way as home and gold loans because the value of a car depreciates as soon as it leaves the showroom. “In case of a car loan, the chances of recovering the loan through sale of the car are minimal. Rather, recovery is basically tagged to the repayment capacity of the borrower. It is, therefore, important that banks have good appraisal processes,” Kumar said. Poor growth in corporate credit is making banks aggressively push their consumer business.

Private sector banks like ICICI Bank and HDFC Bank have seen their retail book grow by over 20% year-on-year. ICICI Bank’s total advances book increased by 17% to Rs3,38,703 crore with retail assets growing 23%. Axis Bank in the March quarter saw its advances grow by 17% year-on-year, driven by growth in retail loans at 31%.

Banks’ 100% finance for cars trigger bad loan fears – Economic Times}

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