Uncertainty Clouds Auto Loans

Uncertainty Clouds Auto Loans
Uncertainty Clouds Auto Loans

For encouraging disinclined buyers to reconsider purchasing Iranian cars, Central Bank of Iran's Governor Valiollah Seif recently announced plans to extend auto loans worth 250 million rials ($7,300 at free market exchange rate).

The loans were planned to be given by November to customers seeking to purchase vehicles in installments.

Those who receive the loans will have to repay the amount in seven years and the loan amount cannot be more than 80% of the vehicle's total value, ISNA reported.  

Seif's remarks have been interpreted in several ways. Firstly, he had said one possible case is that customers pay 16% interest, with the CBI receiving 14% and the carmakers taking the remaining 2%.  

As per an alternative scenario, during the seven-year repayment period, the carmakers may receive 16% interest on the loan and the total interest paid by customers will reach 21%.

An enactment in May had raised the auto loan ceiling in Iran to 150 million rials ($4,400 at market exchange rate) following the approval of the Money and Credit Council. The CBI notified the decision to the banks.

The interest rate was 21% and the repayment period was three to five years. However, in practice, only a few banks had provided the auto loans to customers at an interest rate of 27%.

Eghtesad News recently probed into the matter and revealed that the loans were in fact not meant to be provided by the banks at all. Instead, the carmakers themselves had been told to provide loans worth 80% of the vehicle's value while keeping the sales documents with themselves as collateral.

In return, CBI will provide car manufacturers with cheap loans so that problems related to lack of working capital might be alleviated. In other words, the loans, if given, will involve the customer, automaker and CBI.

According to the report, once the CBI hastily announced the recent news about giving $7,300 as auto loans, certain banks were pressured to provide the loans to a limited number of customers. Auto industry experts, however, believe it is unlikely that the banks will give such loans.

The report claims that attempting to decipher the vague remarks made by the CBI governor, the media misinterpreted the news.

While the plan is set to roll in November, the mechanism for disbursement of loans has not been prepared or communicated to auto manufacturers.

The report says that certain private auto manufacturers have been selling vehicles on credit. Customers are given the car once they pay 30% of the vehicle's worth and the remaining 70% are paid in installments.

The Money and Credit Council, affiliated to CBI, approved the loans Tuesday night in their latest meeting. The issue has raised concerns that car dealers may issue inflated invoices and receive more funds than is actually entitled.

Deputy Minister of Industries, Mining and Trade Mohsen Salehinia claims that the loans will stimulate demand.

Elaborating on the conditions for granting the loans, Salehinia said car dealers will only receive the funds once they submit the promissory notes given to them by their customers for receiving the loans.

In other words, the carmakers and dealers will only receive the amount once a transaction has been completed.

Davoud Mirkhani Rashti, advisor at Iran's Vehicle Manufacturing Association, said most experts are not excited about the auto loans and think that it will not materialize, especially since similar promises in the past were not fulfilled.

He added that automakers are excited because they hope to receive funds, which would kick-start lagging sales, but the pundits remain skeptical.

"People won't receive a penny," he said, while adding that the banks are struggling with too many other problems and will not be bothered with such issues.

"It will probably remain their lowest priority," he said.

The online campaign boycotting domestic cars over their high price and poor quality has lowered sales and the automakers are under pressure. Some have even laid off workers.

Most experts are also of the opinion that the main problem of the auto industry is related to the low quality of cars and high prices, and no amount of loans can help stimulate demand.