Auto loans, which are given to individuals having a certain monthly cash flow, has long been an attractive sector for credit expansion because of the little risk involved. As demand for home loans under the retail banking category has fallen since the earthquake, banks are eager to increase their portfolio in the retail sector by boosting auto loans.
Banks participating in the automobile jamboree have announced cuts in the interest rate for auto loans while also fast-tracking the paperwork so that borrowers don’t have to wait long for their loans to come through. They have slashed the interest rate to as low as 7.25 percent to ensure a higher growth rate in lending.
“We have reduced the interest rate to 7.5 percent for private vehicles and 9 percent for commercial vehicles for the duration of the auto show,” said Jayandra Shah, head of retail banking at Himalayan Bank. “Our aim is to increase the portfolio of this sector at a time when demand for home loans has shrunk since the earthquake due to confusion about the new building codes.”
Banks usually categorize home loans, auto loans, hire purchase and small and medium enterprises focused loans under the retail category.
Like Himalayan Bank, other commercial banks participating in the event have also reduced their interest rates. Mega Bank cut the interest on auto loans to 7.25 percent from the usual 8-11 percent. Likewise, Laxmi Bank and other participating banks have decreased their interest rates for the mega auto mela.
While banks slash interest rates on auto loans during the mega event, auto dealers launch various discount schemes to the delight of potential car buyers. As the auto show is being held just before the Dashain festival, traders expect people to buy new wheels to start off the celebrations.
“All these factors play an important role in increasing credit demand for auto loans,” said Anil Shah, chief executive officer of Mega Bank. “Around 20 percent of the total auto loans issued during the year are extended to clients who book vehicles during the auto show.”
His estimate seems to be correct. Laxmi Bank also extended 20 percent of the auto loans issued during the last fiscal year at the previous Nada auto show.
According to Laxmi Bank’s CEO Sudesh Khaling, they extended Rs230 million in auto loans during last year’s auto show against the total lending of Rs1.25 billion in the sector for the entire fiscal year 2014-15. “We expect to do business worth Rs300 million during this year’s auto show as we have
focused on increasing credit in the sector,” he said.
Bankers have also trimmed the time taken to process the loans. “We will take just three to seven days to provide auto loans,” said Khaling.
Looking at the trend of the last four years, lending in the sector by banks and financial institutions (BFIs) has almost doubled. According to Nepal Rastra Bank (NRB), loans in the auto sector surged to Rs80.99 billion in the last fiscal year from Rs48.99 billion in fiscal 2011-12. Lending growth in the last fiscal year was phenomenal as vehicle registrations in the last fiscal surged to an all-time high topping the two-million mark, said bankers.
The number of vehicles registered at the different Transport Offices in the country stood at 239,583 in the last fiscal year, the highest in a single year, according to the Department of Transport Management.
“Our banks witnessed very good business as the number of people buying automobiles surged,” said Rupendra Wagle, head of retail banking at Global IME Bank. According to him, people are taking auto loans from banks because of the low interest rate.
As banks have been awash in excess liquidity for more than two years, they have been able to provide auto loans at a very cheap rate. Due to the lower default rate, banks usually set the lowest interest rates in the sector alongside home loans. “Banks also wish to increase the portfolio in the sector as there is a low default rate. Our recovery rate in the auto sector is more than 95 percent,” said Wagle.
According to bankers, an expansion of the auto market outside the Kathmandu Valley has enhanced the prospects of auto loans. Cities such as Biratnagar, Bhairahawa, Pokhara and Nepalgunj have emerged as new growth centres for auto loans,” said Shah of Himalayan Bank.
Meanwhile, bankers said that they provide auto loans to people who have an adequate disposable income. “The rule of thumb is that we consider providing auto loans to those who can save around 50 percent of their income to pay monthly instalments,” said Shah of Mega Bank.
According to bankers, income alone does not matter if there are no savings. Banks look at the income, the number of family members who depend on that income and how much is saved after paying for their expenses before deciding to give an auto loan.
“We provide loans of up to 80 percent of the disposable income of the borrower,” said Wagle. According to bankers, as auto loans are provided based on the borrower’s guaranteed cash flow, an assurance of regular income is sought.
Fiscal Year Auto loans
Source: Nepal Rastra Bank