Lower interest rates on loans alone are not enough to attract customers, reveals Srikumar Bondyopadhyay

Price is only one deciding factor in competitive business, the other being customer service. And this is where Public Sector Banks (PSBs) are falling behind their private sector competitors, despite their much-hyped foray into retail banking in the past year. So, while PSBs are offering an interest rate that is at least 2-3 per cent lower than private banks on car loans, they are still losing customers to the latter and private auto finance companies.

It was in October last year that Asim Bagchi first approached his bank, the Indian Bank, for a car loan. Bagchi has been maintaining a savings account at this PSB since 1986. He still found it impossible to secure the loan because he could not furnish the following with his application:

• Two guarantors who must be government employees and proof of their income and residence.
• A collateral in the form of fixed deposit certificates or life insurance policy, in force for the last three years, or a house mortgage covering the full amount of the loan.
• An undertaking by his employer to deduct the Equated Monthly Installments (EMIs) from his monthly salary.
• His income-tax return for the last three years (with minimum annual income return of over Rs 1,20,000).

“I then tried the other PSBs - the Punjab National Bank and Allahabad Bank, among them,” says Bagchi. All these banks were offering car loans at lower interest rates. “But every bank asked for so many documents and guarantees, that I could just not provide,” he revealed dejectedly.

Finally, Bagchi got his new Fiat Palio financed by Sundaram Car Finance Ltd. “Sundaram Finance provided me the loan 2-3 days after I had applied for it,” states Bagchi. “And I was required to submit only a few documents - proof of my identity, residence and salary, and my income-tax return. That’s all. I didn’t have to pledge any collateral either.”

T Robinson, officer, Sundaram Car Finance Ltd, explains, “When we finance a car, the car remains hypothecated to us. Since there is no need for any other collateral or mortgage against the car loan, we don’t ask for it.” Of course, there’s a flip side, too. If private sector banks and finance companies are not as conservative and rigid as PSBs in advancing loans to their retail customers, they offer a relatively lower interest rate on loans for those car brands in which they have a tie-up with the manufacturers, while they charge a higher interest rate where they don’t have such alliances. And interestingly, car manufacturers in India have their tie-ups with private banks or car finance companies only and not with any public sector bank. For example, Sundaram Car Finance gives loans for an annual interest rate of 13.5 per cent, if the car is a Fiat or Hyundai or Maruti or Tata make. For other brands, the company charges an annual interest rate of 15 per cent.

But this is not the case with PSBs. They offer a uniform competitive interest rate irrespective of the make or model of the car. “Most of the time, the private banks and car finance companies reach out to customers through their Direct Selling Agents (DSAs), which we the public sector banks don’t have and they also get a commission from the dealers,” explains T K Arora, manager-retail banking division, Allahabad Bank. “And hence, these private banks or finance companies charge a higher interest rate than PSBs and calculate the EMIs on annual rest basis,” he adds.

Since 2000, the Allahabad Bank is making a major headway into retail banking and, over the last year, it has set up an exclusive ‘Retail Boutique’ at select branch offices. “But, our last year’s experience in the car loan segment has been very dismal,” feels Arora adding that it could get less than one per cent of the retail customers’ pie in the car finance market. He admits that the major drawback for PSBs, including Allahabad Bank, is the complex nature of their documentation requirement. Of late, the private sector car finance business is also showing signs of another welcome development - waiving off the loan processing fees, which used to be 1-2 per cent of the principal loan amount and being charged by all financiers, private or public.

Sundaram Car Finance charges a flat Rs 201 as documentation plus stamp duty fee, Kotak Mahindra Primus doesn’t charge anything at all except for the stamp duty. So is the case with Sundaram Car Finance also.

However, it is not that PSBs are lying low in changing themselves. Take Canara Bank, for example. Jay Prakash got his Maruti 800 car financed by this PSB recently. “The bank approved my loan within a week and gave it to me in the form of a demand draft drawn in favour of the car dealer I bought my car from,” remarks Prakash.

Allahabad Bank has also introduced a scheme - if the loanee makes an arrangement that his EMIs will be deducted directly from his salary, then the bank will allow him a one per cent lower interest rate of 14 per cent. Otherwise, the bank charges a 15 per cent rate of interest. The State Bank of India is offering both fixed rate and flexible rate options to its customers. But the fact remains that there are few takers of car loans from PSBs.

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