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Fri, March 29, 2024

Bumpy Ride for the Auto Industry

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[caption id="attachment_4347" align="alignright" width="900"] Illustration by Anushri Lama[/caption]

By B360 Special Correspondent

The automobile industry which was gradually recovering from the unofficial trade embargo has faced another jolt with banks reluctant to extend auto loans. The industry, according to automobile dealers, has crashed, with sales of four wheelers down by almost 60 percent. Dealers complained that in the first place banks do not accept the burrower’s proposal to finance the car and in some cases if banks agree to finance the vehicle, they ask for down payment as high as 50 percent. This has complicated the vehicle purchasing process discouraging potential buyers. Over 90 percent of vehicles that ply the roads are financed by banks and financial institutions. Today this demand has been suppressed. Nepal Rastra Bank’s regulation does not help. It has just added to the woes of buyers and sellers. Bankers say that they are ready to extend loans provided the necessary criteria are met. “We are not discouraging people seeking vehicle loans,” said Bhuvan Dahal, CEO of Sanima Bank. “But, they should have a secure and steady income to pay the equated monthly installments (EMI) which comprises of interest and principal over the loan period.” However Saurabh Jyoti, former President of Nepal Automobile Dealers Association and authorized distributor for Honda says, “Our clients are complaining that banks are not willing to lend to finance their vehicles. Automobile dealers have to provide one year’s sales plan to the principle company before importing e vehicles and under this situation, automobile dealers will not be able to present such plans”. If such trend continues, according to Jyoti, the automobile industry which is providing employment to 1.6 million people will collapse. Bankers, however, do not agree with the dealers and blame it on the interest rate that has gone up by two folds within a period of less than a year. “Due to higher interest rate, IME of the vehicle loan has increased.It is natural that people will be reluctant to purchase vehicle paying higher EMI,” justifies Dahal. The situation however was not the same a few years ago. Prior to the earthquake 2015, the automobile industry was the only sector that witnessed aggressive growth posting an annual growth of 15 to 20 percent in terms of sales. From the fiscal year 1990-91 to 2009-10, Nepal witnessed the registrations of one million vehicles and one million vehicles were added in the next five years. In the absence of efficient public transportation even in major cities, the tendency of buying public vehicles was increasing. The other factors that pushed the sales of automobiles were affordability with rising income level of the middle class, easy access to finance with banks and financial institutions and rise in inflow of remittance. However, the earthquake and the trade blockade brought things to a crippling halt. The embargo that lasted four and a half months from the end of September 2015 to the beginning of February 2016 saw no shipments come into Nepal, but this slump was temporary. As soon as the blockade ended, automobile sales sky rocketed with sales of passenger car almost doubling than the previous year. While other industries struggled to come out of the shock, the automobile sector revived itself, almost as though insulated from any problem. One of the major reasons behind the turnaround was the eagerness of banks and financial institutions to extend loans. Banks were financing up to 80 percent of the total cost of vehicle charging interest as low as six percent. Some banks even elongated the payback period of the vehicle loan to eight years from the more common practice of five years. There was a high level of liquidity in the banks and it was channelized towards the auto industry. Being a short term investment, automobile financing carries relatively low risk lending. The situation, however, didn’t last long. Gradually, the demand for credit in other sectors too grew. But this rise in credit demand was not matched by deposit growth, because of deceleration in remittance flow. As a result, banks started facing acute shortage of loanable fund. Many banks and financial institutions started breaching regulatory credit to core capital-cum-deposit (CCD) ratio of 80 percent. As per NRB regulation, banks and financial institutions are allowed to extend 80 percent of local currency deposit and core capital as loans which is referred as CCD ratio. In a bid to increase their deposits, banks started increasing interest rate on deposits and engaged in interest rate war among themselves. Even reputed commercial banks were ready to offer an annual interest rate of 14 percent on one year fixed deposits. This escalated the interest rate on loans floated by the banks and financial institutions. Fearing a systemic risk, NRB intervened and introduced stringent measures while unveiling its mid-term review on monetary policy of the last fiscal year in February 2017. NRB directed banks and financial institutions to reduce their lending to unproductive sectors and the automobile industry fell in this category. In what looked like a move to discourage vehicle financing, the central bank directed banks and financial institutions to limit credit value ratio to 50 percent on loan purchase of private vehicles. It meant NRB made it mandatory for those applying for auto loans to make a down-payment of at least 50 percent of the value of the vehicle. As one of the major reasons behind the surge in vehicle sale was easy access to finance, lack of it subdued the demand crippling the automobile industry which contributes around Rs 40 billion to the state coffer annually as duties and fees imposed on the import of vehicles and their spare parts. Addressing the pressing demand of NADA to review its decision to lower the loan-to-value ratio, the central bank issued a revised directive. Now those applying for a private auto loan have to make a down-payment of at least 35 percent of the value of the vehicle whereas remaining 65 percent will be financed by the lending institution. Although, the interest rate on loans is still high, the provision of lower down-payment is expected to give much needed boost to the automobile industry. Automobile dealers are also optimistic that recent decision of the NRB will give life to the industry which has hit rock bottom. “We hope the situation will be better in the coming days with banks and financial institutions allowed to finance up to 65 percent of the value of the automobile,” said Jyoti. “We are expecting vehicle sales to pick from here.”
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