Auto loans drive car sales more

You want to own a car or a bike but don't have enough cash to buy your favourite brand. Never mind, you can always visit your nearest or most reliable financial institution and walk out happily with the ignition keys of the vehicle of your choice.
Financial institutions are here to fulfil your needs and make life more comfortable as retail lending is one of the major portfolios of most financial institutions at present.
On one hand it is a boon for consumers, and on the other it has become a safe haven for banks and finance companies since the lifestyle of Nepalis has undergone a sea change over the last decade.
The hangover of the days of insurgency and the unstable investment climate have also compelled financial institutions to focus on retail lending.
Nepal Rastra Bank's family budget report says that the income of both the rural and urban masses has increased, fuelling consumerism. From a mobile phone to a car or even a house, a consumer can get loans and go on paying easily in equated monthly instalments (EMI). Though rising consumerism is not good in an economy like Nepal in the long run, it has led to a steep rise in retail financing, pushing vehicle sales up.Auto loan is one retail lending activity that is catching up among the urban mass. For banks, it's considered a more secure forte of investment.
"Apart from that, easy availability of auto loans has also fuelled auto sales," said Dambar Saru, Value Centre GM, Mortgage and Auto, Standard Chartered Bank Nepal Ltd, which approves around 110 auto loans on an average per month. "But we must also appreciate the dynamic needs of our consumers and the demography that compliment the sales," he added.Standard Chartered's auto interest rates vary between 7.99 per cent to 9.25 per cent per annum, depending upon whether it is for private or commercial use and sometimes depending upon the loan tenure.
"There are several factors contributing to auto loans being one of the thrust areas for retail lending," Saru said, adding that one of the reasons was the relatively small amount spread over a wide range of customers with secure and reasonable returns attached.
Though auto loan does not guarantee a large investment considering the present situation, the banks' approach towards auto loan is a good way to prevent liquidity from being inflated. Moreover, it does not increase non-performing assets (NPAs).
According to an estimate, current market share of auto lending is around 14 per cent. "Auto loan constitutes 41 per cent of total consumer banking assets portfolio of Standard Chartered," Saru said.
Depending upon the income level of an individual, banks finance up to 90 per cent of a vehicle's cost. The buyer bears the remaining cost, along with processing cost. Processing fee is normally one per cent of the total loan amount. EMI varies according to loan tenure, the loan amount and interest rate.
"Standard Chartered currently charges one per cent of the loan amount to the customer," he said, adding "At present, we have fixed EMI and the amount of EMI varies depending on the tenure, loan amount and interest rate."While sanctioning vehicle loan, the bank does have a ceiling on the maximum amount that it can finance for a vehicle. For example, it can finance only upto 90 per cent of the cost of the vehicle for private use (new vehicles only), and 80 per cent of the cost of the vehicle for commercial use (new vehicles only).
"We finance up to 90 per cent of vehicle price or maximum amount of Rs 7 million, whichever is lower for the private use vehicle and up to 80 per cent of the vehicle price or maximum amount of Rs 5 million whichever is lower in the case of commercial vehicles," he informed.
However, there is a stiff competition in the market due to increasing number of financial institutions lately. Banks have become more customer-centric and market their products accordingly. More competition means more benefit to customers as they can make informed decisions based on service and terms of sanction at particular interest rates. "But banks need to be more careful in determining interest rate which needs to take care of the risk factors as well," one of the bankers said.
Also, easy availability of credit could allow a customer to overstretch beyond his means leading to delinquency and subsequent default. Hence, banks need to be more cautious in selecting target market and in understanding the customers' needs."Retail financing plays a crucial role in generating vibrancy into the economy by offering different products and services to diverse groups of people and communities as per their needs which in turn will fuel demand for consumer products and at the same time increase revenue for the government in the form of various taxes that are levied," Saru added.
Finance facility is available for second-hand vehicles also. "SCBNL extends loans for the purchase of used or second-hand vehicles, either for self finance or 'buying' under the private segment only," Saru said, adding that these vehicles should not be more than eight years old at the time of loan maturity."
For that, the bank has appointed valuers to determine market price of the vehicle and valuation has to be done by two of our authorised independent valuers. Based on their valuation, we determine the loan amount," he said.
Auto loan is also considered a good way to prevent liquidity from getting inflated. However, Saru does not agree, "When we talk about liquidity, there are various aspects to it and a bank's strategy for loan - be it auto or other loans - is linked to its liquidity and risk appetite. Auto loan is a relatively longer term loan with a maturity of three to seven years and it is prudent to have the funding from the bank's long term or core sources.
"However, the government policy has become a roadblock to the growth in auto loans for commercial vehicles. "The Department of Transport Management is very rigid in case of transfer of ownership of such vehicles," Upendra Poudel, chief executive officer of NMB Bank, said and added that in case of commercial vehicles, the department does not allow transfer of iownership of the vehicle saying it has no rule to that effect for Kathmandu Valley.
The result is that if any financial institution brings the vehicle back after the loan is defaulted, the bank can not resell it and the loan remains unpaid.