ICICI bank reviews its used car financing business

ICICI Bank is reviewing its used car financing business model. The bank has closed giving credit limits to its direct selling agents (DSAs), at the time when other banks have only constricted their DSA limits, after being hit by a burst in delinquencies and fraud.

ICICI Bank has also slashed dealer commissions which in turn have resulted in a reduction in the shelf rate for customers from 16% to 14.5%. Last year HDFC Bank and Kotak Mahindra had cut down the dealer commissions from 4-5% to around 2%. DSAs are an important component of the used car loan segment.

ICICI Bank has told agents to submit the files directly to the bank. Thus DSAs would get their commissions, but lose out on large volumes. Earlier, ICICI Bank had set a limit, based on which the DSAs funded the used car loans. But they used to take 90-120 days to complete the paper work regarding hypothecation.

Therefore bad debts increased from sub-1% levels to around 3%. ICICI Bank, which was among the largest used car loan financiers, gave away a mere Rs 20 crore last month. HDFC Bank and Kotak Mahindra disbursements were also low, with Kotak Mahindra’s outgoings falling by 30% in the past six months.

“The rejection rates for loan applications have gone up from 45% to 55%. However, sourcing from some company-owned dealerships has been good due to better customer profiles,” said Kotak Mahindra Prime CEO Sumit Bali. Usually used car finance rates are 3.5% higher than new car loan rates, and are currently floating at 17%. So on cutting down the dealer payouts, ICICI Bank has lowered the shelf rate from 16% to 14.5%.

“ICICI Bank has moved to a scenario of reduced dealership commissions and sourcing of partners. As a result, auto loan rates have realigned to about 14.5%,” said ICICI Bank head of car and commercial vehicle loans, Ravi Narayanan.

A case against ICICI Bank for doing unfair trade practice

Another case of unfair trade practice by ICICI bank has come into lime light. For this the bank has been directed to pay Rs 20,000 as compensation to a complainant and Rs 2,200 as litigation costs. The District Consumer Disputes Redressal Forum found the bank guilty of deficiency in service after a sanctioned loan of Rs 1, 02,000 was shown to the complainant against the told Rs 91,000. The bank has also been directed to restore the loan account of the complainant.

The forum in its ruling said, “It is yet another case of unfair trade practice on part of the bank in disbursing the loan to a third party instead of the complainant and thereby causing a loss of Rs 11,000 to the complainant and benefiting their stooges by giving them benefit of the aforesaid amount”. The forum also blamed the bank of teaming up with the Car Bazaar in order to serve up their vested interests.

Surjit Kumar Gupta in his complaint stated that in November 2005, an ICICI executive approached him with the offer of financing his old car at a low rate of interest. At that time he was assured a loan of Rs 1 lakh with equated monthly installments (EMI) of 36 months. He was then given a cheque of Rs 91,000 with an EMI of Rs 3,560 every month. The complainant was regularly paying the installment but he was not satisfied with the service of the bank, therefore he approached it to clear the whole amount. According to him the outstanding amount shown by the bank at Rs 46,218 in October 2008, was highly inflated.

When the complainant asked for the explanation but the bank neither returned the excessive amount nor gave any satisfactory reply.

In its reply, to the forum the bank stated that the full amount of loan sanctioned was Rs 1,02,000 as availed by the complainant. Bank denied that it made a short disbursal of Rs 91,000.

The forum, headed by president Jagrup Singh Mahal, found merit in the argument that Max Car Bazar is being supported up by the employees of the bank in order to favor them with a wrongful gain and to cause a wrongful loss of Rs 11,000 to the complainant. The forum apprehended “The payment was made to Max Car Bazar instead of making the same directly to the complainant. It is an unfair trade practice on the part of the bank.”

ICICI plans New Year gift by slashing rates by 50-75 bps

ICICI Bank, the country’s largest private sector bank is planning to cut interest rates by 50-75 basis points across the board in the new year which will make home and car loans cheaper. A senior banker informed with direct knowledge of the development, the rate cut will happen “very soon” — maybe early next month.

However, ICICI bank will not do phased reduction in rates unlike its rival HDFC Bank. “Whatever reduction they go in for, it will be at one go,” the banker told ET. At present
ICICI’s prime lending rate (PLR) is 14.25%. Its home loan range extends to 11.5-12.25% for floating rates while the fixed rate is around 15.5%. In car loans, ICICI’s average is around 15%.

ICICI will implement rate cut uniformly to all its businesses. This would mean it will also make home loans and car loans cheaper. It would be quite different from HDFC Bank, whose rate cut left the home loan segment untouched because it’s under HDFC, which owns 19.4% stake in HDFC Bank.

The decision to reduce interest rates will come in support of the Reserve Bank’s cut in the repo and reverse repo earlier this month. However, some public and private sector banks have already announced rate cuts. Union Bank of India was the first to announce reduction in PLR by 0.75 percentage points to 12.5%. HDFC Bank followed by reducing 50 basis point. The cut by HDFC Bank has been announced in two trenches of 25 basis points each, the first from December 15 and the second from January 1.

This year ICICI’s retail business saw a growth of around 5%. In contrast, its corporate business has grown at a 10-15% clip.

Although the corporate business is much smaller currently, being less than half of the retail business. The spiffy growth in the corporate business has generated rumor that ICICI might focus more on that segment but the bank says there is no intention to give less attention to retail business.

At present home loan rates across various banks stand around 10.5% for sub-Rs 20 lakh loans and around 12% for above Rs 20 lakh loans. On the other hand car loans stand around 12.5-16% depending on loan profile and kind of model chosen.