Interest rates are hardening, wherever they are allowed to harden, across the board whether it is consumer loans, auto loans, housing loans or general corporate loans.

Lets get to the auto side of the business and auto financing. Are rates going up there or whether there are prospects of loan growth slowing down there as well?
Ramesh G Iyer, MD of Mahindra Finance and Dipak Poddar of Bajaj Auto Finance discuss the impact of the new rate hike on the auto industry.

Dipak Podar says that the rate hike has not had much impact on volumes up till now. However, he says that they will have to hike rates if interest rates go up by another 100 bps.

On the other hand Ramesh Iyer says that the rate hike may impact PV sales.

Are rates going up for your company, for tractor financing. Do you see any material impact on tractor loan growth therefore because of hardening rates?
Iyer: Yes, the borrowing cost is going up, but as of now we are trying to see how we can be good at transaction cost. We are not trying to pass-on all of it to the customer. But in the last three months or so the loan rate has gone up for the borrower as well, close to about 50 bps to 100 bps.

What kind of sensitivity do you see in demand growth? Will it stop at 50, will there be more and do you think demand growth or loan growth can get somewhat affected?
Iyer: I do not believe so, because even if it is a 100 bps growth on an asset value of close to Rs300,000, there is about a Rs3000 impact. I think this Rs3000 is not a make or break deal and if it going to impact the demand somewhere, then I think that the manufacturer, the dealers and the financers should get together to see that the customer is not inconvenienced.

What has been your experience with two wheelers and do you expect that to impact volumes?
Poddar: We have marginally increased our rates from 1 August by 100 bps and our ticket size is low, it is averaging about Rs30,000-32,000. So we do not see much of an impact as far as the volumes are concerned. But if interest rates go up further, which seem to be on the cards, then it could be a consideration.

How much do you think it might impact volumes by and how much do you think you might have to further hike rates by?
Poddar: It depends on how much the interest rates go up. If it goes up by 100 bps more then we can live with this present increase. But if it goes up more than 100 bps then we will have to further increases our rates. But as I said we are on the low-ticket size and increasing by 100-200 bps is not going to impact our business too much in terms of volumes. We are about 60% higher in volume compared to the same quarter last year, as of 30 June.

What is the picture on the net interest margin front or the interest spread front for companies like you. You say that you do not want to pass down the extent hike. In a rising rate scenario would you then learn to live with slightly lower margins to compensate so that your demand growth does not get affected?
Iyer: Two things happened; one is we looked at our product mix as we are into all kinds of products like cars, tractors, utility vehicles etc. So there is an opportunity for us to take a relook at our product mix, maybe we would increase second hand vehicles, which gives a better yield, so I do not see net margin suffering.

But when I said that we do not pass it on, that maybe to the extent of 25 bps or 50 bps that does not get passed on, but beyond 100 bps, we will be required to pass it on. The other way to look at this interest rate is how it impacts the volume. Most of us then try and give an extended loan period, for example, instead of 36 months we may give a 42-month loan. So the customer's cash flow is not effected in terms of his monthly repayment, and he need not worry, even if the rate goes up by 1%, it gets accommodated.

In your experience which one has been the most sensitive to rate hikes in terms of volumes? Is it the tractor segment or the passenger vehicles?
Iyer: I would think that people who buy vehicles for commercial applications are able to accommodate the cost because they also have an output, which they may re-price. But as far as personal vehicles are concerned, there is always negotiation, which takes place. So passenger cars may get a little effected.

How sensitive do you think is two-wheeler offtake or loan offtake to earnings because 200 bps is not a very small uptake in interest rates after all?
Poddar: At present we have done only 100 bps. We are almost equally big in consumer durables and other types of products like personal computers and other products, which are not as sensitive as two-wheelers are, to rates. So I do not see our overall margins shrinking because of these rate hikes.

Is this phase getting pinched both ways because aside from interest rates, the two-wheeler companies themselves have raised prices of their products? Have you seen any impact of that?
Poddar: It is too early to tell. As far as Bajaj Auto is concerned, the policy still has to be announced in terms of pricing. So I cannot comment on the price increase of two-wheeler manufacturers. If one is talking about Rs500 or Rs1000 increase in the price, over a period of time on Rs30,000-35,000 is not much.

How are costs going up? Could you talk about the other side, how much have your cost of deposits actually gone up in this period?
Iyer: Yes, the borrowing cost has moved up close to 100 bps but fortunately for us, our asset liability matches up well, we are close to 100% on our matching. So only our new borrowings, that's the marginal cost goes up while our overall average cost is still well under control. That's why I do not see huge pressure on our spreads.

Some peer bankers seems to have got a letter this morning saying do not raise rates, you have not got any such letter from the ministry of finance this morning, have you?
Iyer: Not yet. Since we have not raised rates, probably we have not got it yet.