Automobile companies are examining a new threat to the recent rebound in their sales growth. That is the spectre of a rise in interest rates for loans to finance commercial and passenger vehicles, possible within the third quarter of this financial year.

As a response to the likely rise in auto loan interest rates, automobile companies are planning measures such as heavy discounts, special schemes and arrangements with banks to cash in on the demand during the festive season.

?If interest rates firm up by over 100 basis points, auto companies will look at offering heavy discounts to customers to increase sales. With the festive season around the corner, they may also look at roping in banks and dealers to offer special discounts to customers. We are already seeing big auto companies coming to us, especially for two wheelers in rural areas?, said V Ravi, chief financial officer with Mahindra & Mahindra Financial Services Limited.

Figures from Society of Indian Automobile Manufacturers shows domestic sales of passenger vehicles has risen 9.45% year-on-year between April and July this year. Sales of commercial vehicles (bus and goods carriers) were up 16%. But this is far lower than the growth rate of last year and that?s worrying the auto companies.

?Any increase in interest rates is a bad news for the auto sector, which, of late, has been showing signs of growth. The industry is showing some signs of recovery and any upward movement of interest rates will be a bolt on the industry?s growth chart,? said Mayank Pareek, executive officer, marketing and sales at Maruti Suzuki India Limited.

The options before the industry are not too many to counter such a rise. And Ravi said playing around with the monthly installments was difficult, as auto loans are not extended beyond five years. ?It also depends on how much interest rates firm up?.

Currently interest rates on loans for passenger vehicles hover between 11% and 12.5%, while it is 11% to 13% for commercial vehicles. The latter segment depends heavily on bank loans (about 95%) and would, therefore, take the brunt of any interest rate hike. For passenger vehicles, the dependence is around 60%, said an ICICI Bank official with the auto loan division.

Confirming the likelihood of an increase in rates, Ashok Khanna, executive vice-president and business head in-charge of auto loans at HDFC Bank, said, ?There will be a spike of interest rates across the board by at least 50-100 basis points in the next two to three months.?

Ravi also said the market anticipates interest rates would go up by 50-100 basis points by October-end.

Speaking to FE, dealers from the Federation of Automobile Dealers Association said they too were expecting interest rates to go up in the next one and a half months. The commercial vehicle segment could, however, see a lower rise as the government will look at promoting their sales to meet the expected demand to service the infrastructure sector.

According to the Reserve Bank of India, overall credit growth across industries has witnessed a drop to 14.89% for the fortnight ending Aug 14, 2009, as against 15.79% for the fortnight ending July 31, 2009. Auto loans constitute about 15-16% of the total retail loans for the banking sector.

The industry is, therefore, hoping to see a growth of around 25% during the festive season to counter the possible dip in sales thereafter. ?Banks will let the festive season pass through, since it will act as the barometer to decide the quantum of rise in the interest rates,? said VG Ramakrishnan, director, automotive and transportation, Frost & Sullivan, South Asia and Middle East. He added that the consumer spending has not gone up as expected despite the liquidity condition seen at comfortable levels.

?It is expected to further fall in January, when the inflation will be in full swing and so will be the interest rates?.