Economy, Business And Markets

Bank’s Averse to Financing Car Purchase

Bank’s Averse to Financing Car Purchase  Bank’s Averse to Financing Car Purchase

Espite the Money and Credit Council’s directive in May to increase the ceiling for car loans to 150 million rials ($5,000 at the official exchange rate) Iranian banks refuse e to comply.

Following MCC’s decision, the Central Bank of Iran had announced that banks and credit institutions can cover 60% of minimum automobile prices – approximately 150 million rials -- at 21% return rate with no initial deposit required.

 After four months there is still no action on the part of lenders, with private banks refraining from making the loans altogether and state-owned and former state-owned banks imposing such strict conditions for loans that would ultimately deter applicants, according to ISNA News Agency.

Some banks are reluctantly and halfheartedly lending the $5,000 loans but requiring initial deposits and charging higher rates.

One of the banks has even let clients take out car loans up to 200 million rials ($6,600) under special conditions: loans are to be repaid in three years at a 24% rate, but applicants should open a 50-million-rial account with the lender, have a minimum monthly income of 10 million rials, present two credible sureties, and be willing to buy a car worth 250 million rials ($8,200) or more.

The once influential auto industry is seen as a key source of revenue since its inception in the 1960s, but much of the sales are either on installment basis or through loans.

 Banks’ Reluctance

Despite banks’ depleting reserves – largely due to mounting bad loans -- and their lack of interest in general auto loans, Financial Tribune has learnt that lenders are more enthusiastic in financing utility vehicles such as heavy duty trucks.  

The main reason for banks’ preference has to do with strong collateralization behind truck drivers’ guild and their ability to reimburse the loans.  But when it comes to sedans and other passenger cars, there is no guarantee for lenders to get their money back as debtors could end up insolvent with vehicles that are unlikely to generate any income for their owners.  

Banks also have a tendency to shun small-scale loans as they may not be cost-effective for them. This leads banks to redirect their resources toward lucrative businesses rather than get involved with small amounts to the common people mostly from the working class and at the lower-end of the economic ladder.