Car loans: Bankers should apply floating rate

With interest rates rising, bankers should finance cars under the floating rate scheme. When the rate hardens, bankers can hike the lending rate and borrowers will understand because when the rate softens, bankers will reduce the lending rate..

BOTH HDFC Bank and Kotak Mahindra have reduced their lending rate by two per cent in respect of car finance. The reason behind this generosity is obvious – with interest rate moving northward and car sales beginning to fall, it makes sense to come up with a sweetener if consumer interest in car acquisition through bank finance is to be sustained. And it is not as if the said banks are going to pay for the sweetener from their pocket – they will be robbing Peter and paying Pal - they will correspondingly reduce the incentive presently being paid to car dealers who originate the car loan proposals. Not to be left behind, ICICI Bank is said to be putting in place a floating-rate scheme for car financing.

ICICI Bank, as said earlier, is to roll out a car loan scheme under the floating rate regime. In fact it withdrew this scheme earlier this year owing to poor response from prospective borrowers. Now that the interest rate is moving northward, it believes that the floating rate scheme will meet with a better response. In fact, it proposes to shift its entire car loan portfolio to the floating rate regime. The base rate will be the floating reference rate or FRR applied in respect of the bank’s retail products. The FRR will be revised every quarter. This is a welcome move on the part of ICICI bank. Since car loans are not big ticket loans, they are interest rate-sensitive. After all, car loanees are individuals and even a modest hike in interest rate irks them. Equally, a modest fall in interest rate pleases them. Therefore reducing the interest rate when the interest rate regime softens will go a long way in earning the goodwill of such borrowers.In the circumstances, the car borrower will not mind if the bank raises the interest rate regime when the interest rate regime hardens. This will go a long way in ensuring prompt recovery of the money lent. All said and done our bankers will do well not to fall prey to the US assumption underlying lending, viz., the risk in lending to those who are slightly short on creditworthiness can be mitigated by hiking the lending rate. Far from mitigating risk, the assumption only led to a crisis in US which affected other countries too.

Source : merinews

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