Slowing car and two-wheeler sales in the past few months along with rising interest rates are likely to take a further toll on demand, causing more pain to auto manufacturers.
Buyers of consumer goods, too, will feel the heat as rates rise and input costs surge, forcing companies to increase prices.
While several lenders, including non-banking financial companies (NBFCs) and banks have already hiked interest rates, others are monitoring the situation closely and may do it soon, given the liquidity tightening.
The recent crisis at Infrastructure Leasing & Financial Services (IL&FS) would put pressure on interest costs of NBFCs, which in turn will mean higher interest rates for buyers, said executives at these firms.
Take the case of Shriram Transport Finance (STFC). The largest financier of pre-owned trucks increased its rate of interest a week ago by 100 basis points. The average rate of interest now stands at 16 per cent, said Umesh Revankar, managing director at the NBFC.
However, Revankar is not worried about the hike impacting demand in the short term as truck sales have been robust this financial year.
“As long as the economy is doing well, demand will be good. The question is how do you meet the demand? If the liquidity is tight, the interest rates will go up,” he said. He, however, fears some impact on demand once the festive fervour dries up after November.
Mahindra & Mahindra Financial Services Limited (MMFSL), the finance arm of the Mahindra group, also took an average interest rate hike of 25 basis points on select products and segments in August, said Ramesh Iyer, vice-chairman and managing director, MMFSL.
“If you borrow at a rate which is 25 to 50 basis points higher, you may want to hold on to the rates and pass it on only if it remains persistently high. One has to look at the average borrowing costs. For us, we have enough headroom to protect profitability,” said Iyer.
Meanwhile, banks, too, have been firming up interest rates. Rates on car loans (an average of eight banks) have already inched up from 9.11 per cent in March to 9.39 per cent in September, according to CRISIL Research.
Sources: Banks, companies
Passenger vehicle sales of top five auto makers declined 2 per cent year-on-year in September. The cost of owning a personal vehicle is estimated to have risen by six to seven per cent, the highest since 2010-11. The main reasons are rising fuel prices, increase in finance, insurance and vehicle registration cost, brokerage IIFL said in a report.
Shyam Mani, managing director at Tata Motors Finance, the largest financier of new trucks, said, “The availability of funds is not as easy as it was six weeks ago,” Interest rates have moved up over the last six months in line with the increase in its borrowing costs, he added without specifying the quantum.
Some like Hinduja Leyland Finance, the finance arm of the Hinduja group, are yet to hike rates. “We will look at increasing our lending rates in line with the movement in rates on the borrowing side. We do expect a 25-40 basis point hardening across the spectrum of retail assets at an industry level and this process has already started off,” said Sachin Pillai, chief executive at Hinduja Leyland Finance.
Sundaram Finance MD TT Srinivasaraghavan said rates have been creeping up for six months. “It is not something which has happened suddenly. The IL&FS event has created some extra pressure on liquidity,” he added.
Meanwhile, prices of consumer goods have seen three rounds of price hikes, and buyers will have to fork out more once the festive season ends. Avneet Singh Marwah, CEO, Super Plastronics, which makes and markets Thomson & Kodak televisions in India, said the effective cost of financing for his company had gone up by 160 to 170 basis points. For the dealer and retailer, too, the rise should be similar.
While a wider coverage of consumer finance schemes has ensured more consumers opting for such schemes and better sales, this has impacted pricing as well along with other factors like the falling rupee, rising prices of raw materials and hike in import duty. One more hike is expected in December.