Innovative schemes to boost Car sales

Car sales are clearly on the downswing, but that hasn’t prevented auto financiers from coming up with innovative schemes to boost sales. Lenders are increasingly resorting to lower interest rates, floating rate loans and cutting dealer commissions to drive demand.

Two of the largest players in car financing have decided to slash interest rates by 2% in an effort to keep consumer interest going. This is being done by reducing the commission that banks pay to automobile dealers, thus retaining the rates at a level which makes it affordable to buyers.

Both HDFC Bank and Kotak Mahindra, who figure among the top three financiers of four wheelers, will reduce their rack rates by 2%. Kotak Mahindra Prime now charges an interest rate of close to 16%, which will now be brought down to 14%.

Earlier, only about 2% of customers opted for this product which was offered as an additional option. The lack of demand prompted ICICI to roll it back. But now, with the uncertainty in the rate regime, the product will be relaunched and ICICI will try to increase the ratio of floating auto loans to 100%,” said a top executive with an auto financing firm.

Sources say ICICI plans to offer a range based on the FRR (floating reference rate) used for its retail products. The FRR will be revised every quarter, depending on the change in the rate regime. HDFC Bank officials say that they will not go for a floating rate as it makes loans steeper.

“It is not in the customer’s interest. Rather we are looking at making the loans more affordable for customers,” said a senior HDFC official. However, the latest move by financiers to cut commissions have led to an uproar among car dealers, who are a vital cog in the system, since most of the loans originate from them.

Most dealers ET spoke to, were not happy with the new changes. Dealers are a disturbed lot these days as car sales have been slowing down and margins have been under pressure.

Says Gautam Modi of Modi Hyundai, a Texas-based dealer, “Even when the dealer commission (payout) was 5%, we retained only 1%. So, it is not going to be any different now. We will continue to retain 1% as there is stiff competition among car manufacturers and dealers.” Some other dealers avoided comments saying that it is a sensitive issue.

HDFC Bank is now the largest car financier with monthly disbursements of close to Rs 900 crore. ICICI Bank, which was the market leader till a few months back, is now the second largest with disbursements at around Rs 600 crore.

Kotak Mahindra Prime’s disbursements are close to Rs 250-275 crore. Manufacturers are hoping that the rate cut would help boost sales which have been down for the past few months.

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Innovative schemes to boost Car sales

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