Auto financiers, which had tightened lending norms in the face of rising defaults last year, may loosen their fists in the wake of the Calcutta high court's order of Wednesday, reaffirming the lender's right to seize vehicles if customers stop repaying loans. This could turbo charge sales of cars and other vehicles, nearly 80 per cent of which are through loans.
A division bench of the high court gave the judgement while hearing 21 appeals filed by GE Capital Transportation Financial Services Ltd against customers who had stopped paying repayment instalments and had obtained injunctions from a lower court against confiscation of their vehicles.
"Banks will get confidence in disbursing loans to customers who are borderline cases (neither prime nor sub-prime). Gradually, financiers will become more liberal,'' said R S Kalsi, national head of sales, Maruti Suzuki Ltd. According to him, this will start showing in sales in three months.
As customers began defaulting on auto loans from the middle of last year, financiers started tightening lending norms. Some, like ICICI Bank, curbed their exposure to auto loans. Non-banking finance companies like Mahindra Finance and DBS Cholamandalam Finance were hit by high interest rates and the liquidity crunch.
"Financiers have become very cautious. If they get 100 proposals for loans, they clear only 50 per cent of them. Earlier, they would be clearing 90 per cent of proposals," said Raj Chopra, CEO of Competent Automobiles, a Maruti dealer.
Last year, the Reserve Bank of India had come up with detailed guidelines on repossession of vehicles. It prevented lenders from visiting the defaulting borrower's home and required them to give them more time. This made it difficult to repossess vehicles. Earlier, a Delhi court barred the use of muscle men or force of any kind to recover loans.
The Calcutta high court's judgement does not reverse these orders but may lift sentiment. "We need to have guidelines for repossession of vehicles that balance the interests of customers and financiers. The current guidelines are skewed in favour of defaulters," said a senior executive of an auto manufacturer.
According to Competent's Chopra: "Financiers were feeling helpless, as they could not go and catch a defaulter and repossess the vehicle." Sumit Bali, CEO, Kotak Mahidra Prime, said the Calcutta high court order would help as you now require a court order to repossess the car and then seek permission to sell it, which can take 2-3 months more.
During this time, a lot of defaulters could hide or dispose the car. With this order, we should be able to repossess the car after sending loan recall notice and police intimation," Bali added.
Banks allege some customers have been going to courts with frivolous claims, and they are scared of taking on delinquent customers.
There have been a few cases where courts have found customer claims frivolous. "These are isolated cases. In general, there's no support system for the lender. The rights (to repossess) have always been there, but when I try to use them, I will be open to accusations,'' said a senior banker, though he said he believed that there was increasing realisation of the problem.