Financing norms for two-wheeler loans become stricter  

April 7, 2010

India is the second largest market in the world, in terms of volumes, for two-wheelers. However, the penetration level in the country remains very poor at about 6% to 7%. Despite favourable conditions, increasing input costs and higher interest rates are likely to restrict sales. The fresh, stricter norms, applied by some of the lenders to two-wheeler buyers, may also cast its shadow on volume growth.

Last month, some auto financiers, such as ICICI Bank Ltd, HDFC Ltd and Kotak Mahindra Bank raised interest rates by 25 basis points (bps) to 50 bps (100bps=1%). In India, most people buy new vehicles with the help of lenders. The credit purchase of the total auto market fell to 20% during FY09 from around 40%-50% in FY07.

Many lenders, following the slowdown during FY08, have suffered on account of high non-performing assets (NPAs). Similar was the case with dealers as well. Both lenders and dealers were offering two-wheelers at 0% interest rates and down payments touched rock-bottom rates of Rs99.

Increased NPAs forced lenders to take a re-look at two-wheeler financing. As a result, lenders have removed the direct selling agent (DSA) link from their line-up. Banks are now financing through their branch networks only and have stopped selling with aggressive tactics. Some lenders like ICICI Bank and GE Money—known for their aggressive marketing—are no longer present in the two-wheeler financing space.

As far as down payments are concerned, lenders are now asking for about 30% of the total cost of the vehicle. This is a major change, considering the fact that during the peak year of FY07 the same lenders were asking for a maximum of 10% as down payment. Not only that, some lenders have made it mandatory to conduct a thorough background and credit check of the customer.

With the withdrawal of 0% finance schemes and other aggressive dealer discounts and incentives, lenders have brought down their NPA risks. "All these measures have led to a slow but healthy recovery in financing. Over the last six to nine months, disbursals by public sector banks (PSBs) and non-banking finance companies (NBFCs) have gone up. As a result, we expect lenders to increase availability of finance to the two-wheeler space gradually," said Enam Securities Pvt Ltd, in a research report.

Over the next two years, industry volumes are expected to grow above the historical average rate, as improved consumer sentiment and availability of retail finance should boost urban demand. Further, rural market growth is expected to remain stable with higher income visibility and disposable income through non-farm sources and existing low two-wheeler penetration levels.

Most two-wheeler manufacturers have announced ambitious growth targets on the back of recent model launches. "In the medium term, we expect marginal impact from the smaller manufacturers on the overall competitive landscape. Impact of higher competition would be determined by action of the top two players in the motorcycle segment with combined domestic market share of about 79%," said Ambit Capital Pvt Ltd, in a report.

"In the current operating environment, wherein demand is expected to be relatively strong and cost increases are on the anvil, we expect the top two players to focus on protecting profitability rather than indulge in price wars to augment market share. Nevertheless, higher competitive intensity would result in higher spend on advertising and marketing, as new variant launches would be at frequent intervals," the brokerage added.   — Yogesh Sapkale