Should we Recyle the Economy?

They are a new-found vehicle for the government to rev up the ailing auto sector. Taking a cue from the finance ministry, public sector banks (PSBs) are now aggressively marketing car loans, which, hitherto, was the domain of private sector behemoths such as ICICI Bank and non-banking finance companies, who were forced to apply the brakes on such disbursals following a fear of delinquencies and slowing demand.
In the current economic dispensation, the auto loan segment has been identified as one of the worst-hit by the government, which has appealed to PSBs to perform a rescue act. Except for the State Bank (SBI), other PSBs were never comfortable in car loan financing.
It is largely because of their partial success in home loans — a retail segment which PSBs stayed away from until the late 1990s — that has perhaps given them the courage to seriously look at car loans.
However, the dynamics of car financing vary from that of a home loan. In case of a home loan where the asset — the house — against which the loan is extended, seldom sees a depreciation in its value; the hypothecated asset in case of an auto loan — the car — depreciates in its value from day one.
Consequently, while a bank can more than recover the loan amount in event of a home loan default, taking possession of the vehicle may not be that simple in the light of stringent recovery norms put in place by RBI, a fact discovered by private sector banks and NBFCs over the past few months.
“Against this backdrop, PSBs may find it difficult to analyse the loans if they don’t have the necessary expertise in this area of lending,” says Chiragra Chakrabarty, principal consultant at PricewaterhouseCoopers, adding, “This could lead to an adverse selection problem. Moreover, with the banking regulator coming down heavily on the recovery methods adopted by certain banks, there is a challenge for them (PSBs) of recovering loans.’’
Top PSB captains themselves admit that the dynamics of this market are entirely different. MV Nair, CMD, Union Bank of India, explains: “This market was, over the years, ruled by private banks and NBFCs. The dynamics of the market are different, and we are aware of the risk. So, we exercise caution at every level.”
“PSBs are traditionally not cut out for car financing business. But there is an opportunity for banks, such as ours, as the aggressive, private players are absent in this segment. A lot of space has been created,” says George Joseph, CMD, Syndicate Bank.
SBI has always been among the top few car financiers. Other PSBs are now latching on to the opportunity by signing up with automakers for financing deals. These include the likes of Andhra Bank, Central Bank of India, Syndicate Bank, UCO Bank and Union Bank.
In the auto loan segment, PSBs primarily focus at car and two-wheeler loans. Tenure for car loans range from 3-7 years. However, they operate differently from private banks. While private banks typically offer loans only up to 75-80% of the ex-showroom price of the vehicle, PSBs, led by SBI, offer up to 80-90% of the on-road price, which includes insurance and registration costs. This may be advantageous for a customer, but it adds to the risk for the bank.
There have also been instances of fraud in the car loan market. Senior bankers point out that the documentation of one out of four customers has been forged. Even if PSBs take the necessary safeguard action, other challenges remain — chief among them being an improvement in the pace at which loans are sanctioned. Leading dealers have indicated that while PSBs take around 8-15 days to clear a loan to the dealer, private banks do the job within a day or two.
PSBs claim to have streamlined their marketing force so that they can deal with customers at the dealers’ end itself to reduce the processing time. SBI, for one, now promises to sanction a loan in three days and deliver the cheque to the car dealer within five days. Still, they have a long way to go to match their private sector peers’ efficiency in this respect.
However, a senior SBI executive justifies the due diligence. “We don’t intend to be overly aggressive in the car loan segment. In the process, we tend to lose some business. We reject many a proposal because we try to ensure the quality of the asset,” says the executive.
In order to minimise the risk of auto loans turning bad, SBI and other PSBs will primarily focus on the salaried individual segment.
Apart from the dynamics of lending, PSBs will also have to contend with supply-demand issues. Car production has not picked up while the economic slowdown has affected consumer confidence. It will come as no surprise if people continue to go slow on borrowing.
This could be borne out by CLSA’s recent report in which the investment bank noted: “We expect the steepest fall in vehicle loans, with annual credit flow for this segment remaining stable over 2009-10 and its share falling to 5% of incremental lending.’’
So, while the government prods PSBs to help revive the sagging auto sector, it must be kept in mind that these lenders do not end up becoming like UTI, which in the past, met its nemesis trying to prop up the stock markets.