After slashing interest rates for small-home buyers and SMEs, the government has shifted its focus to prospective two-wheeler and passenger car owners. It has asked banks to ensure that loans for automobile purchases are cleared and home minister P Chidambaram in Parliament on Tuesday conceded there was a need to ease financing for prospective buyers.

?As far as the auto industry is concerned, yes, there is a problem. The government is addressing that issue. We have cut excise duties by 4% across the board. Banks have been advised to lend to borrowers to purchase automobiles and two-wheelers,? said Chidambaram in reply to a query from Rahul Bajaj, MP. The minister was replying on behalf of Prime Minister Manmohan Singh, who holds the finance portfolio, during question hour.

Sales of passenger cars and two-wheelers have plunged since October. Last month, car sales fell by nearly 20%, while two-wheeler sales dropped by nearly 15% for the second month in a row. Aggregate sales grew by only 0.48% and 3.76%, respectively, for the fiscal until November. The Cenvat rate cut announced on December 7 has been followed by price cuts by all major carmakers, but experts are sceptical that sales numbers would pick up given that banks have all but frozen fresh loan sanctions.

The government also expects the fuel price cuts announced on December 5 to spur demand for vehicles. Chidambaram said in Parliament on Tuesday that more cuts could take place, ?if found feasible?.

Two-wheeler companies are concerned that leading financiers like ICICI Bank and NBFCs have stopped giving auto loans, while their portfolios for cars have also thinned. Public sector banks have almost totally eliminated auto finance from their lending portfolios after the credit squeeze.

?The situation is bad for two-wheelers mainly because they attract a higher rate of interest, which has gone up to around 22% after a series of hikes in the last six months. Moreover, very few retail finance options are available to buyers after most banks withdrew completely from financing two-wheelers,? says an official with a leading two-wheeler company who did not wish to be named.

?Apart from the high interest rates, there are two things happening at the finance end. Firstly, the rate of rejection has gone up to 30-40% now, against 10-15% earlier. Secondly, banks have brought down the limit of the amount sanctioned. From 85-90% of the total cost of a vehicle, banks now only finance 75% of the cost,? says Arvind Saxena, senior vice-president, Hyundai Motor India.

Chidambaram said automobile companies should cut prices, too: ?There is an obligation on the part of the automobile industry to cut prices.? According to Rahul Bajaj, who is also chairman of Bajaj Motors, negative sales growth amounted to a recession for the auto industry. Bajaj said home loans were becoming cheaper, but complained that even public sector banks were not reducing rates for two-wheeler, car or commercial vehicle loans.

?There is certainly an increase in the overall rejection rate as banks have become a little more cautious. Moreover, as the market continues to be volatile, NBFCs and some banks do not want new business and are declining applications,? adds Rajan Pental, senior vice-president (auto loans), HDFC Bank.

Abdul Majeed, auto analyst and partner at PricewaterhouseCoopers, said there has been a cautious approach both from buyers as well as financiers. ?Buyers are not confident of taking loans at such high interest rates nor of their ability to repay them. Banks are not willing to block their money in cases where there is even the slight possibility of default,? he says.