Money
Auto market zooms ahead
Fiscal 2016-17, which ended on July 15, was not a very good year for the Nepali automobile sector, as sales of cars, pickup trucks, vans and sports utility and multi-purpose vehicles dropped by around 4 percent.Fiscal 2016-17, which ended on July 15, was not a very good year for the Nepali automobile sector, as sales of cars, pickup trucks, vans and sports utility and multi-purpose vehicles dropped by around 4 percent. This was the first time sales of these four-wheelers had dropped in the last five years.
The fall was recorded at a time when new auto brands are entering the market to cash in on the country’s rapidly growing auto market.
Nepali roads, on average, were seeing an addition of around 17 new cars, pickup trucks, vans, SUVs and multi-purpose vehicles per day 10 years ago. That number went up to around 88 in 2016-17.
Several factors have played a role in bringing about this change. The first is easy financing options to purchase vehicles. These days, one can purchase a car by making a monthly instalment of as little as Rs9,000, which is quite affordable to young corporate officials and others generating a decent income.
“These youngsters have gradually started seeing cars as a necessity rather than a luxury. This change in perception is also driving the growth of the auto sector,” said Anjan Shrestha, president of the NADA Automobiles Association of Nepal (NAAN).
Of course, not everyone in Nepal can buy a car, as one-fifth of the population still lives below the poverty line. But those who could, used to follow the principle of “one family, one car” in the recent past. This concept is gradually becoming obsolete today, with working parents and children driving their own cars. This is fuelling the growth of the auto sector in an unprecedented manner, although blips like that of the last fiscal year, when sales dipped moderately, are recorded periodically.
The main driver of the auto sector till date has been the banking sector. In other words, Nepal’s auto market is growing in tandem with the banking sector. And since the banking sector is expected to continue growing in the coming days, the future of the auto sector looks promising.
Yet there are times when feelings of insecurity shroud the auto sector. This happened in February, when Nepal Rastra Bank barred banks and financial institutions from financing more than 50 percent of the value of the vehicle. Before the introduction of this regulation, banking institutions were extending up to 90 percent of the value of the vehicle as loan to vehicle buyers. The new regulation meant auto loan seekers had to make a down payment equivalent to 50 percent of the value of the vehicle at the time of purchase. This directive dealt a big blow to the auto sector, as around 90 percent of the vehicles plying on the streets are bank financed. “This was the main reason that caused sales of cars, pickup trucks, vans, SUVs and multi-purpose vehicles to drop in the last fiscal year,” said Shrestha.
Nepal saw registrations of 31,967 new cars, pickup trucks, vans, SUVs and multi-purpose vehicles in 2016-17, as against 33,421 in 2015-16, according to the data of the Department of Transport Management. This was the first time registrations of new four-wheelers of these categories had taken a dip since the fiscal year 2010-11. “This was a setback for the auto sector,” said Shrestha. Despite this, the overall auto sector grew by 29 percent in 2016-17, thanks to a sharp jump in sales of two-wheelers, which account for almost 80 percent of the total auto sales in the country.
In 2016-17, a total of 354,071 units of new two-wheelers, mostly motorcycles, were registered in the country, up from 267,439 units in 2015-16.
Sales of two-wheelers surged in the last fiscal year on the back of easy bank financing options as well. Although the two-wheeler segment also suffered after the central bank barred banks and financial institutions from financing more than 50 percent of the value of the vehicle, the impact was not that big.
“This is because many financial cooperatives, which are not regulated by the central bank, also finance bikes,” said Chiranjibi Shah, CEO of VG Automobiles, the authorised distributor of Suzuki two-wheelers for Nepal.
Now, the entire automobile sector is heaving a sigh of relief, as the central bank has allowed banks to finance up to 65 percent of the value of the vehicle.
“This is a welcome step and we are expecting auto sales to jump in the coming days,” said Shrestha.
Vehicle sales in Nepal usually start picking up from September and continue till mid-December. Sales during this period account for almost 40-45 percent of the annual automobile business.
While auto sellers are planning to make hay during this year’s peak sales season, expensive credit is likely to ward off potential buyers.
At present, no financial institution is extending auto loans at below 10 percent. Worse, banks and financial institutions raise interest rates abruptly whenever their cost of funds goes up, increasing the financial burden on borrowers.
Bankers say they are aware of this problem. And they say they can resolve this issue if the regulator adopts flexibility in the enforcement of the base rate.
“A flexible approach in the implementation of the base rate will enable us to float auto loans at fixed interest rates. This will allow borrowers to pay the same interest throughout the loan payback period,” said Diwakar Poudel, ?head of Brand, Marketing and Corporate Affairs at Standard Chartered Bank Nepal. “This way, borrowers can make informed decisions based on their estimates on future cash flow.”
It is not possible to introduce fixed interests rate at the moment because lending rates are fixed on the basis of base rates, which are revised every quarter. And banking institutions are barred from extending credit at below the base rate.
In this context, if the interest on auto loans is fixed at, say, 11 percent, but due to certain circumstances the base rate has to be raised to, say, 12 percent, then auto loans cannot be offered at below 12 percent interest.
“If the central bank rethinks its position, we can provide some relief to borrowers,” said Poudel.