The car industry, going through a lull phase, expects sales to pick up after the State Bank of India (SBI) announced a reduction in base rate by 0.25 percentage points, a move that is likely to be followed by other lenders.
Car makers feel that this will help push up festive season sales, when demand is traditionally up. Car sales in India had declined by 18% in August due to high interest rates and slowdown in the industry.
Lowering of base rate, to which consumer loans are linked, makes all loans cheaper.
“The rate cut will have immediate reflection in the small car segment. People will firm up purchase decisions as rate cut will lower EMIs (equated monthly installments),” said Pravin Shah, chief executive, Mahindra & Mahindra. “As far as higher segments are concerned the impact could be low, but there will be an overall positive feeling.”
“We just started seeing the effect of the rate reduction. The real action will be from mid-October, when the festival season kicks in,” said Nitish Tipnis, director, sales, Houver Automotive, which handles Nissan sales in India.
During the April-August period, car sales grew by just 7.5% year-on-year, less than the double digit growth witnessed during the same period last year. Any news of interest rate reduction ignites hope in the car industry as around 70% of the sales are through financing.
SBI, which has reduced interest rate on car loans twice in the past two months, has seen positive impact on car financing after the rate reduction.
“In case of SBI, the number of cars financed per day stood at 700 when the EMI per lakh (for loan of seven years at 11.25% interest per annum) was R1,725, and number of cars financed per day went up to 1,200 when EMI per lakh (at 10.75%) came down to R1,699,” said a senior official of SBI.
Along with SBI, many other public sector banks had cut rates for car loan in August. They are now expected to cut rates in coming days acting on the cue by the Reserve Bank of India which slashed the cash reserve ratio (CRR) by 0.25 percentage points in the mid of September. CRR is the proportion of deposits banks have to park with the central bank.