Car Companies, Dealers Undercut Finance Firms

Auto companies and car dealers are taking to subsidising the large discounts being offered by auto finance companies to tackle the downturn in the domestic industry, thereby taking a hit on their margins.

Various low-interest schemes are now available at single-digit rates -- some are zero-interest plans -- for short term loans.

For example, Hyundai Finance, a subsidiary of Hyundai Motor India, is offering loans at eight per cent over two years.

Banks and auto finance companies charge rates typically between 13-17 per cent on new car purchases. It is thus apparent that auto companies and dealers are subsidising the reduced rates in a desperate bid to push sales.

An HDFC Bank official said, "We are charging our usual rates of interest, between 16-16.5 per cent. The difference in interest rates being charged by us and that being offered to the customer is borne by auto companies and car dealers."

Gaurang Shah, executive director of Kotak Primus, said, "The interest rates are mutually decided by the finance companies, auto companies and auto dealers together. Over the last four months, competition has really increased forcing many to lower rates."

A car dealer of a leading Mumbai based auto company said, "Auto companies are offering subventing schemes to the finance companies for offering loans at lowered interest rates. Typically, for a low interest rate loan being offered to customers, auto companies are paid the difference, once the loan is cleared."

Richard Miranda, head of Orex Auto Finance, said, "Both auto companies and dealers bear the difference in the interest rates. Although their margins might get squeezed, the companies and dealers might not be making huge losses, chiefly because extremely low-rate loans are given only when sales suffer badly."

According to auto analysts, some of the auto companies have floated new subsidiaries to prevent the subsidised costs from showing on their books.

An analyst at a local brokerage firm said, "Auto companies and dealers have to resort to subvention schemes, as in some cases the subvention amount is less than the loss in revenue due to high inventory levels at both the factories and dealerships."