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Interest rates deflate bikes on expressway

Interest rates deflate bikes on expressway

Author | Source: The Economic Times | Saturday, May 26,2007 9:19 AM

Interest rates deflate bikes on expressway

KOLKATA: Tightening of the monetary policy over the past several months has taken a toll on passenger vehicle and two-wheeler sales growth. Potential buyers appear to be holding back purchase decisions amid concerns over inflation coupled with the steep rise in interest rates. While the two-wheeler segment has witnessed a 6% slide in sales in April 2007 compared to the previous corresponding period, the passenger vehicle segment reported lower-than-expected growth. Automobile makers now expect the lacklustre spell to continue for several months.

Under normal circumstances, nearly 85% of new cars are bought using financing options. Following the rise in interest rates, this ratio has fallen to 70-75%. In case of two-wheelers, the ratio now stands at 50% compared to 60% prior to January 2007. Auto loans are now available at around 13.5% while banks charge 21-23% for two-wheeler loans. Pre-January 2007, both auto and two-wheeler loans were available at an average 300 basis points below current levels.

Not surprisingly, the Society of Indian Automobile Manufacturers (SIAM) fears if the tight monetary policy continues for a longer span, the passenger vehicle space could see only 12-15% growth in 2007-08 against 21% scaled in 2006-07. But for the two-wheeler segment, SIAM has also projected an annual growth of 10-to-12%, which is nearly along the lines of the 11.4% levels scaled in the previous fiscal. Hero Honda Motors vice president (marketing & sales) Anil Dua told ET: “The two-wheeler segment has witnessed a slowdown over the past few months. The deceleration may have been due to the uncertainty prevailing on account of rising interest rates, and consequently customers postponing their purchases.”

It may be recalled that both the two-wheeler and passenger vehicle segments were buzzing with high sales volumes till the third quarter of 2006-07. The lacklustre mood held sway from January onwards, thanks to multiple rises in interest rates. Since then, the interest rate on auto-loans have risen by as much as three percentage points. Incidentally, during April 2007, two-wheeler sales shrunk by 6% to 5.70 lakh units compared to 6.06 lakh units in April 2006. While in the passenger vehicle segment, some 1.05 lakh units have been sold against 94,771 units in April 2006.

“There's a combination of factors impacting business. Rise in interest rate is just one of them. Consumers are also deferring purchase decisions as a few car makers have temporarily deferred the launch of new models to avoid the negative spell in sales,” HDFC Bank senior vice president for auto finance Rajan Pental said.

The passenger vehicle segment, which includes passenger cars, utility vehicles and multi-purpose vehicles, has witnessed a mere 11.8% growth in sales in April 2007 compared to the corresponding period in 2006. “Although the medium-term outlook for the industry is positive, the segment is expected to grow by just about 10% to 12% during this fiscal.

The industry expects to achieve sales of 1.5-1.6 million units in 2007-08,” said P Balendran, vice president, General Motors India. Auto dealers are also saddled with huge inventories at warehouses in the prevailing scenario. Stock correction is also a major reason for low-offtake at manufacturer level, SIAM pointed out. To buck the sluggish trend, a clutch of leading auto makers including Hyundai Motor India and General Motors have come up with special financing packages to lure customers. For instance, Hyundai Motor is offering a option of 8.99% interest rate for its Santro customers. GM has also tied up with a few banks to easing out the interest burden of its customers.

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