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Tight money puts consumer durable makers in a squeeze

With inflation looming and interest rates rising, its a double whammy for consumer durable makers who went for sweetened offers to boost demand when the going was good, writes Ruchi Hajela.

business Updated: Aug 03, 2008 23:03 IST
Ruchi Hajela

With inflation looming and interest rates rising, its a double whammy for consumer durable makers who went for sweetened offers to boost demand when the going was good.

Already reeling under fast shrinking profit margins on the back of high input costs, manufacturers say they now have no other option but to bear higher interest cost of “zero interest” schemes introduced to lure customers into buy-now-pay-later schemes.

Industry estimates show that around 20 per cent of air-conditioners, refrigerators and other durable products are sold through finance schemes.

With inflation remaining close to worrisome 12 per cent in the last few weeks, the Reserve Bank of India (RBI) has raised key benchmarks to tighten money supply.

“With zero-interest finance options, we have been bearing the load of the high interest rates and will have to continue with these as consumer spending is low in these inflationary times,” said PK Gupta, senior general manager, Finance at LG India.

“There has been a drop in sales through financing,” acknowledged Ravinder Zutshi, Deputy managing director at Samsung India.

RBI’s policies have resulted in a 6 per cent drop in commercial banks’ consumer finance portfolio in the first two months of 2008-09.

Besides a rise in interest rates, the exit of large players such as ICICI Bank, Citi finance, GE Money from the space have also resulted in a sharp drop in consumer loans.

The chances of being accosted by a consumer finance representative offering instant loans at retail outlets have also diminished.

“As major players have withdrawn, companies are now left with only two private financiers—Bajaj Auto Finance and Shriram Finance,” Zutshi said.

Samsung plans to continue its finance offers but is yet to decide whether the company will absorb rising costs or pass it on to dealers and financiers.

Finance companies echoed similar views but said the future was not certain. “Interest costs for consumer durable manufacturers have risen. But if rates continue to increase, these might have to be passed on to the market,” said Rajeev Jain, CEO of Bajaj Auto Finance company.

White goods maker Whirlpool India said it would wait-and-watch. “So far we have managed to keep the finance options attractive for the consumers,” said Sukhpreet Singh, general manager, Brand Marketing,at Whirlpool Of India.

“If the cost of financing keeps on rising, manufacturers would be forced to review their spends on such promotions,” Singh said.