Vehicle Scrappage Policy: Here’s how it will impact car buying and auto lending

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The new norms for vehicle scrappage are likely to shake up the auto sector. Private vehicles that are over 20 years old and commercial ones over 15 years old will have to undergo mandatory emission tests.

Vehicles that don’t pass the tests will be impounded and their owners penalised. Secondly, vehicles older than eight years will have to pay road tax even if they pass this test. A vehicle owner who voluntarily scraps his vehicle under this policy will be provided incentives for buying a new one.

Road Transport and Highways Minister Nitin Gadkari said that up to one crore vehicles may be eligible for scrapping.

So, what does this mean for the auto industry as well as auto lending?

New Cars To Be In Demand

As the policy takes hold, we should see an immediate demand for new cars as older vehicles are scrapped or impounded. This will naturally increase interest in auto lending. Interest rates are currently at historic lows and this should motivate new buyers to seek financing at low costs. We are going to see a flurry of first-time or second-time buyers from smaller towns. While the bulk of the demand for auto loans comes from the top cities, there’s much faster growth for loan demand in non-metros.

NBFCs May Be Able To Lend More

India’s shadow-banks are coming out of a difficult period. Credit policies have been tightened and lending activities have slowed own. NBFCs play a crucial role in lending to small borrowers as well as industry. We expect NBFCs to lend more to the auto sector in the coming days, and a recent announcement by the Reserve Bank of India signals this. The RBI announced that NBFCs will be able to take three-year loans at the floating repo rate in order to lend to priority sectors like automobile manufacturing. So far, these repo-linked loans were available only to banks. Therefore, low-cost credit will now be available to NBFCs from the RBI, and this should have a positive impact on credit availability for the auto industry as well as those looking to finance auto purchases.

Old Cars May See Less Demand

Given that a vehicle’s age will gain significance, there may be fewer takers for used cars. A quick scan of used car listings reveals that it’s not uncommon to see vehicles – especially high-value ones – that are 10-15 years old. Given that it is going to be tougher to own these cars due to new levies, these cars will become less attractive. If this happens, the market for used car loans will decline.

Interest In Leasing May Rise

Since there will be penalties on old vehicles, upgrading vehicles periodically will become a requirement and we may see higher interest in car leasing. More people may be interested in leasing new vehicles that they can use for limited periods and return to car lessors without being bound by the costs of insurance, maintenance, and taxation. But for this to take off, leasing will have to become cheaper for the costs benefits to become more visible.

The performance of the auto sector is often an indication of India’s overall economic well-being. One expects the scrappage policy to do its bit to boost sentiment.

(The writer is CEO, BankBazaar.com. Views expressed are personal)