Auto loans are continuing to shine bright with average monthly net borrowings over the past 11 months standing at about Rs8 billion. Assuming an average loan size of Rs2.5 million, about 3,100 cars are being granted a loan each month since July. In May-21 based on the same assumption, a quick calculation suggests about 120,000 cars have an active loan on them. Though car sales were much higher during FY19, auto loans are having the best year so far with net borrowings reaching Rs12 billion for the first time ever in Mar-21.
Auto financing in total consumer loans has now reached 43 percent. The Gods of fortune are smiling down on car makers and car buyers alike, and this growth is not over. Auto loans are expected to grow even more as government’s auto policy becomes operational. First, there is a reduction in sales tax for vehicles with engines under 1000cc and a markdown in federal excise duty (FED) across the board—even high-end luxury vehicles—which could potentially reduce car prices between 2 and 6 percent for consumers.
The net impact of this price change would certainly have an effect on the monthly burden of an auto loan on borrowers. Given an up-front equity of 20 percent, at prevailing rates, consumers would pay between Rs1500 to Rs4000 less on a 5-year auto loan. Given that car purchases have been growing anyway, the lower price would certainly give further impetus to volumes.
The government is also mulling over other incentives including a subsidy on auto loans (read more: “Auto policy: Theatre of the absurd, June 30, 2021) which could potentially double the impact of these reductions. While the different modalities of the scheme remain to be seen—for instance, which car buyers will be able to take out the subsidized loan, which vehicles would be eligible under this loan, what would be the terms of these loans (and how would the government fund this subsidy)—one thing is clear: bank financing toward car buyers will certainly culminate into higher peaks over next year.
The question of the socio-economic impact of these different measures, how equitable these incentives are for car buyers at different income scales and whether the new cars will in fact, be “affordable” are queries for another day.