Banks privately delaying the transmission of interest rate cuts to automobile buyers, and the Federation of Automobile Dealers Associations (FADA) calls for intervention from the Reserve Bank of India (RBI)
The Federation of Automobile Dealers Associations (FADA) has written a letter to the Reserve Bank of India (RBI) Governor, Sanjay Malhotra, expressing concerns about the delayed transmission of policy-rate cuts to automobile borrowers by some private banks [1]. This delay undermines the effectiveness of RBI's monetary policy and adversely impacts auto buyers who should benefit from lower interest rates promptly.
FADA has requested RBI to take several measures to address this issue:
- Review and monitor private banks' repo-rate pass-through lags in the auto-loan portfolio.
- Issue corrective directives to ensure uniform and 100% transmission of interest rate cuts to automobile buyers within a strict, time-bound frame.
- Enforce transparency through periodic public disclosures of banks' cost-of-funds calculations, which some private banks currently cite to justify delayed transmission.
- Mandate clear RBI guidelines for concessional lending rates, priority sector classification, and improved access to MSME schemes for auto-retail MSMEs eligible under the Udyam framework.
- Extend the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) coverage to authorized auto dealerships and service workshops, currently excluded.
- Address concerns about direct financial incentives being given by banks to dealership staff, bypassing dealership accounts, and call for such practices to stop.
- Recommend lowering the risk weight on auto loans from 100% to stimulate greater loan disbursement, as vehicles are easily realizable collateral.
These measures aim to ensure that policy benefits reach auto borrowers swiftly and uniformly, improve credit access for electric vehicle financing, and support affordable lending in rural and Tier 2/3 towns, aligning with broader economic and mobility goals.
FADA Vice President, Sai Giridhar, has emphasized the importance of these measures, stating that by reducing the risk weight on auto finance, lenders could stimulate an estimated 20% growth in disbursements over the next five years. FADA has also urged RBI to monitor and enforce a strict, time-bound transmission of policy-rate changes across all banking institutions.
It is important to note that FADA has not requested RBI to conduct a focused review of private banks' repo-rate pass-through lags in the auto-loan portfolio. Additionally, FADA has not alleged that in several instances, banks have not extended preferential interest rates to MSME-registered dealerships, although auto workshops, service centres, and smaller dealerships are eligible for MSME registration under the Udyam framework.
[1] Source: FADA's letter to RBI Governor Sanjay Malhotra [2] Source: RBI's policy-rate reductions history [3] Source: FADA's suggestions for boosting access to credit and EV finance [4] Source: FADA's statement on the need for recalibrating risk weights in auto loans
The Federation of Automobile Dealers Associations (FADA) has proposed that the Reserve Bank of India (RBI) should review and monitor private banks' transmission of policy-rate cuts to ensure prompt benefits for auto borrowers. This includes enforcing transparency through periodic disclosures of banks' cost-of-funds and addressing direct financial incentives given to dealership staff by banks.
FADA has also suggested that the RBI should consider lowering the risk weight on auto loans to stimulate greater loan disbursement and align with broader economic goals, such as supporting affordable lending in rural and Tier 2/3 towns and improving credit access for electric vehicle financing.
Moreover, FADA has urged RBI to address concerns about the exclusion of authorized auto dealerships and service workshops from the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and mandate clear guidelines for concessional lending rates and improved access to MSME schemes for auto-retail MSMEs eligible under the Udyam framework.
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