Carmakers Maruti Suzuki , Hyundai and Mercedes Benz are offering buyers “teaser loans”, a move sources said followed a softening of the Indian central bank’s stance on the products in the face of a coronavirus crisis induced economic slump.
Although the Reserve Bank of India (RBI) never banned teaser loans, which offer low interest rates for a limited period before rapidly rising, its obvious disapproval had kept banks from offering them in the past, bankers said.
Maruti Suzuki, Hyundai and Daimler’s Mercedes Benz have all teamed up with banks to offer purchase schemes involving teaser deals, recent press releases show.
Maruti Suzuki India was hopeful there would be “an uptick in demand” as a result of its scheme, Shashank Srivastava, an executive at the carmaker, told Reuters.
A recent company survey of 150,000 customers showed a clear desire for “flexible financing”, Srivastava added.
Hyundai, Mercedes Benz and the RBI did not respond to requests for comment.
The RBI has previously said the terms on such loans were not transparent, warning that similar products had been instrumental in the U.S. subprime crisis of 2007-2008.
Five banking sources told Reuters there was a consensus among lenders and automakers that promotional teaser loans were needed to revive car sales, which automakers have warned could fall as much as 45% this fiscal year in a worst-case scenario.
“People will require some easier terms due to COVID-19 and thereafter they can pay higher, so it’s a scheme which is in line with the times,” one of three sources aware of the RBI’S change in position told Reuters.
Banking sources also said India’s Finance Ministry is pressuring banks to increase lending, although they are already saddled with over $120 billion of bad loans.
This burden is likely to rise in the wake of a two-month lockdown that has pummeled India’s economy.
The Finance Ministry did not immediately respond to a request for comment.
“There is a huge demand from the market to bring back promotion-led loans,” the retail head of a private bank that is considering launching a similar scheme said.
“After all, what other option do we have right now?”
One bank was considering using teaser loan schemes for mortgages to attract borrowers, a banker at the state-owned lender said.
A Mumbai-based ex-banker, who declined to be named, said there was a risk that teaser loans would eventually lead to more bad loans at Indian banks.
“Both the bank and the borrower should be aware and beware.”