The Reserve Bank of India’s initiatives to lower the cost of funds for borrowers is beginning to show results on the ground. Several public sector banks have rolled out aggressive car finance schemes at very affordable rates. As a result, month-on-month car sales are booming once again. However, the Covid-induced lull between March and July 2020 is expected to significantly slow down overall annual car sales.
But the sales push by the banks has taken the penetration of auto financing to a high of 80 per cent of all vehicles purchased, up from 75 per cent a year ago.
The central bank has, in recent policy reviews, kept its hawkish stance on inflation in abeyance to focus more on growth. But elevated price levels have constrained it from cutting the benchmark rates any further. Instead, it has taken a slew of other measures to ensure that the cost of funds remain affordable for investors and borrowers, both private and public.
The RBI has held bigger open market operations (OMO) auctions, conducted special OMOs for states and set easier terms for the bond portfolios held by banks. Then, it has opened an on tap RLTRO for about $14 billion at very affordable rates. This has facilitated lower lending rates.
Then, in further good news for lenders, the inflation figure is expected to return to the 2-6 per cent band that is the RBI’s comfort zone in the latest reading due later today. It may be mentioned that the rate of inflation had exceeded this band in 11 of the 12 previous readings. This, as mentioned above, had prevented the apex bank from cutting the headline rates any further.
The additional liquidity and other measures, as well as nudge from the central bank and the Finance Ministry, have prompted public sector banks to cut rates on auto financing by more than 1 percentage point over the 12 month period between January and December 2020.
There is a pull factor as well. The Covid-19 pandemic has fuelled the demand for personal mobility solutions. Many people and families who earlier depended on shared / public transport for commuting are now looking at owning personal vehicles to avoid unnecessary contact with the public at large.
This has generated additional demand both for new as well as pre-owned cars, which is being satiated by cheap loans and better services provided by the state-owned banks.
According to the Society of Indian Automobile Manufacturers (SIAM) figures, passenger vehicle sales slumped to zero in April 2020 from more than 140,000 the previous month. Since then, sales rose to 36,576 in May, 116,928 in June and 197,610 in July.
After that, it has consistently clocked sales of more than 200,000 every month, touching highs of 292,883 and 333,600 in the festival months of September and October, respectively.
And proving the point that it wasn’t just festive sales and pent-up demand that was driving the near steroid-charged sales growth, India recorded a robust 2,86,476 passenger vehicle sales in November, an increase of 8.8 per cent over same month the previous year. Early estimates of December sales figures point to an 11 per cent jump in sales.
That’s a massive turnaround from the doom and gloom scenario apprehended by SIAM in April this year, when it had predicted a 25-45 per cent decline in sales for the full financial year. Now, on the back of the robust pick-up in demand, experts are forecasting overall sales for the year to decline less than 20 per cent, mainly because of the three-month long lockdown.
Since data from lenders suggests that the sale of pre-owned vehicles has also recorded a jump during this period, it follows that a significant portion of this spurt in sales has come from replacement demand.
With PSU banks now offering loans at less than 8 per cent interest rates, and the overall economy picking up, car sales are expected to continue to rise in the months ahead as private lenders also join the party.