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Friday, October 04, 2013

FinMin circular on cheap loans and its impact on industry
In an move to boost sales of two wheelers and consumer durables , the finance ministry  today announced that it will provide additional capital to the public sector banks so that they can offer cheaper loans to these sectors.

However companies in the sector are divided while some say it will improve market sentiment others say it will  not give a  major fillip to consumer demand and sales.

Currently the government has provided for Rs 14,000 crore to the PSU banks as pegged in the Budget for 2013-14. The aim is to spur demand for shoring up economic growth, which fell to a four-year low of 4.4% in the first quarter of 2013-14.

The decision in-principle was taken at a meeting between Finance Minister P Chidambaram and RBI governor Raghuram Rajan. Economic affairs secretary Arvind Mayaram was also present on the occasion.

The move has met with a  lukewarm response.  In two wheelers industry anything between  30% to 40% of the sales are though consumer finance.

“Whether it pushes sales will depend entirely on the quantum of the reduction in interest rates. If it is negligible, it won’t make a difference, Also it is possible that consumers buying in cash might shift to a financing scheme, so overall sales do not get impacted” says Rajiv Bajaj managing director of Bajaj Auto the country’s second largest two wheeler company.

Bajaj also says that the decision of buying a two wheeler is dependent on many other factors-like the price of petrol which is very high and  the high inflation which is pushing his overall costs of living.

He says that the cost of acquisition of a two wheeler through a loan constitutes for 50% of his total outgo the rest is on fuel and maintenance. “Surely a reduction in interest will make a difference in his acquisition cost but the key is how much,” he adds.

Others say that it will help in improving market sentiment. "This is a welcome move and is expected to improve buying sentiments to boost 2 wheeler sales in the festive season. More than any substantial saving in the EMI  we see it to have a positive impact on the market eco system" says Y S Guleria vice president sales and marketing of Hond Motorcycle and Scooters Ltd.

Consumer durables ( excluding mobile phones) manufacturers while welcoming the move  on record,  privately admit that it won’t lead to any major push for sales.  Currently about 12% of the industry sales are through financing and credit card schemes. However for premium products like LCD Tvs and top line refrigerators  this could go up between 20% cent.  Sourabh Baisakhia, business head, air conditioners, LG Electronics, says, "This is a good move and coming before the festive season, there will be a positive impact on sales."

However a senior executive of a top consumer electronics company says: “Most of the loans are given by private banks or NBFCs and is limited to metros and tier one cities. PSUs would have less than 10% share of this business mostly through State Bank of India. Also credit cards offers are mostly from private banks . So this move is of not much help”.

Also the impact could be limited only at the top end of market.  Most companies in the last few years have used financing to upgrade consumers to high-end products. Bulk of the financing today that happens, explains, Suresh Kumar Bandi, divisional deputy MD, Panasonic, happens for products above Rs 35,000. "For products below Rs 15,000 to 20,000, financing is not substantial," he adds.

In a statement today the finance ministry has said "The Government has decided in-principle to enhance the amount of capital to be infused into Public Sector Banks (PSBs). In the Budget for 2013-14, a sum of Rs 14,000 crore was provided for capital infusion. This amount will be enhanced sufficiently."

The finance ministry has noted that the move will bring relief to the consumers, especially the middle class and it is expected to give a boost to capacity addition, employment and production," the finance ministry said.

The statement, however, did not give specific figures of the money to be given to the banks for this purpose. Given the fact that fiscal deficit has already touched almost 75% of the Budget Estimate, the ministry will have to walk a tight rope in providing this stimulus.

The meeting discussed the issue of credit growth in different sectors. At the end of September 2013, growth of Gross Bank Credit stood at about 18%, year-on-year.

"However, credit growth is sluggish in some sectors leading to the conclusion that demand in these sectors remains subdued. Based on the discussions, the Government has decided in principle to enhance the amount of capital to be infused into Public Sector Banks," the statement said.

Two wheeler sales however in September grew by 23%,  after a flat growth in July and a single digit growth in August . Between April-August however the industry grew by a mere 0. 7% in sales, much lower than expectation.

Courtesy: The Business Standard