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.