CHENNAI/MUMBAI (TIP): As the slugfest in the passenger vehicle market gets bloody, banks are now offering loans at below the RBImandated base rate. Termed a “grey area”, these special schemes are on offer for luxury car customers with loan size upwards of Rs 40 lakh. Banks like ICICI offer special schemes under which luxury car customers get auto loans at 9- 9.15%, which is below its base rate of 10%. Other non-bank lenders and captive financing outfits offer rates as low as 7.5-8%. This is much cheaper than the standard rack rate – the rate for walk-in customers – of over 11%. When contacted, ICICI Bank refused to comment. However, sources in the financing circuit say that banks get around the RBI‘s base rate stipulation by booking the loan at the base rate on their books and booking dealer payouts separately as promotional cost or brokerage cost. “This means that if the rack rate on luxury cars is 11.5%, then dealer payout will mean 2-2.5% knocked off the interest rates so the effective rate of interest is actually lower than the base rate of 10%,” said a senior source with one of the top three auto financing firms.

Typically, these subventions are on offer for high-end luxury cars with price tags of over Rs 90 lakh. “According to the RBI mandate, banks cannot lend below the base rate,” said another senior official with one of the top three auto financing firms. “Even if we assume that the car is being seen as a consumer product, such high-end and big-ticket loans cannot be passed off as consumer product loans. Besides, how can you borrow at 10.25% and lend at 9.15%?” he asks. The base rate logic, however, does not apply to NBFCs, including captive financing arms, which can offer rates below 10%. Take BMW Financial Services India, which is offering schemes at “less than the market rate”. Said Philipp Von Sahr, president, BMW Group India: “In an effort to stimulate the market, we have chosen the path for our company financial services to develop the best financing product in India and we offer attractive offers to customers to tide over this not-so-easy market environment.” BMW officials say the rates vary depending on the model, timing and the age of the stock. For instance, on the newly launched 1 Series it would be 11.25% but on the older model X1 it would be much lower. About 35-40% of BMW’s sales are through its captive financing arm.

Sources say that NBFCs can offer lower than rack rate on their schemes because they do not come under RBI’s base rate mandate, which is only meant for banks. “Right now, some NBFCs and banks allow the luxury car customer to negotiate rates as low as 9%,” said a top financier. Of course, not all NBFCs offer lower than rack rate. Daimler Financial Services, the captive financing arm for Mercedes Benz India, is one of them. Said MD Sidhartha Nair, “Given the current challenging scenario in the market, there are no plans for a lower than rack rate finance scheme. At the most, we try to avoid passing on short-term funding cost to the customer but soon we’ll need to rethink our rates.” Daimler Financial Services currently charges around 12.5% for a three-year loan though the rates typically depend on down payment and loan structure.