ICICI Bank-Maruti Offer ‘Teaser’ Car Loans Amid Covid-19 Slump
The concept of teaser loans, a first in the auto financing segment, has been frowned upon by RBI in the past.
Amid a deep slump in auto sales, India’s largest passenger car company and its second largest private lender are attempting to draw in customers using financing schemes, which, in the past, have drawn the ire of regulators.
Maruti Suzuki India Ltd. and ICICI Bank Ltd., on Tuesday, said they would offer a set of car loan schemes, which include lower upfront equated monthly instalments, which rise over the tenure of the scheme.
Together, the two are offering three schemes:
- Flexi EMI scheme: Customers can choose to repay a smaller monthly instalment for the first three months of the loan and then repay higher amounts later.
- Balloon EMI scheme: The scheme allows customers to repay a small amount as EMI for the entire five-year duration of a car loan, except the last instalment. The repayment is structured in a way that the last instalment would work out to a fourth of the sanctioned amount.
- Step up EMI scheme: Customers will be allowed to structure their repayments in a way that their EMIs increase by 10% every year for the five-year duration of the car loan.
The schemes would be offered on “select models” for “select customers”, a press release said.
“The Covid-19 pandemic has created a unique situation in the automobile industry—there are sections of customers who want to commute in private transport to maintain social distancing and hygiene, but their cash flow is under temporary stress now. Our specially curated, flexible EMI schemes are aimed at helping these customers to fulfil their desire of owning a car,” the press release said quoting Ravi Narayanan, head of secured assets at ICICI Bank.
While this is the first time a large bank is offering such a scheme on car loans, similarly structures schemes offered by State Bank of India on home loans a decade ago had been frowned upon by the Reserve Bank of India.
Loans with lower initial payments, which rise later during the tenure, were dubbed as ‘teaser loans’ by the regulator back then and discouraged. The RBI feared that a sudden spike in repayment amounts could lead to a higher risk of default.
A former SBI executive, who spoke on conditions of anonymity, said that offering staggered payments on car loans makes little sense as the tenure is much shorter. This could result in customers being burdened with higher repayments at a time when the long-term impact of Covid-19 and the national lockdown is not yet clear, the former SBI official said.
Not everyone agrees.
Harshvardhan Roongta, a financial planner and co-founder of Roongta Securities, said the product could make sense in an environment where borrowers have seen a temporary reduction in salaries.
"Typically in teaser home loans, because of longer tenure of the product, customers are burdened with very high repayments towards the end of the loan. This is why there was opposition to such a product. But in a short tenure loan, this could make sense,” Roongta said. “In the current circumstances borrowers have seen their monthly salaries cut by 20-30%, but this is just a temporary phase. In a year or two this will normalise and customers will be able to afford higher EMIs,” he said.
However, customer choosing such a scheme should make sure that the interest burden does not increase by more than 100 basis points, Roongta added.
The scheme comes at a time when auto sales crashed due to Covid-19. Even before the lockdown imposed to curb the spread of the virus, car sales had been slow for at least a year.
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As of March 31 2020, ICICI Bank had outstanding car loans worth Rs 32,217 crore, up 2.5% year-on-year. Car loans contributed 7.9% of the bank’s total retail loans. For ICICI Bank, retail loans make up 63.2% of the Rs 6.45 lakh crore loan book at the end of the last financial year.
For the sector as a whole, vehicle loans grew 9.1% in the year till March 2020.