Second-hand car prices have dropped 15 to 25 per cent following the imposition of stringent Supreme Court norms over repossessing and selling cars of owners defaulting on their loans.
The rules, which has extended the repossession and selling process to three months against 24 hours earlier, has already seen lenders turn away 15 per cent of those who approach them for loans.
This has not only impacted new car sales but also prompted second-hand car dealers to push sales at lower prices rather than build up costly inventory. Repossessed cars account for about a quarter of second-hand car sales. But the good news is that second hand car prices are crashing.
"Prices will fall in the range of 15 to 25 per cent and could fall even further. The drop will be lower for small cars and higher for luxury ones," said Arif Fazulbhoy, director of Mumbai-based Fazulbhoy Motors, one of the oldest car dealers.
Although the Supreme Court directive has had the effect of lowering the supply of such cars to the second-hand market, the longer repossession process means their value will fall significantly before they can be re-sold.
"As the case for repossession gets entangled, it will impact the resale value which goes down so dealers want to sell quickly at a lower price rather than keep inventory," Fazulbhoy added.
The Supreme Court's repossession norms stipulate that a bank must issue two notices of loan default to the customer followed by a police complaint and then repossess the car.
"Now when repossessed cars come to us, they are already four to five months old from the date of default. Since we don't want their value to depreciate we sell quickly even at a lower price," said Ashish Gaur, VP, operations, Mahindra First Choice Wheels. "Also, the fact is that no bank is giving money to finance second-hand cars, which is putting pressure on prices as well," he added.
Car financiers say loan defaults are rare in the case of premium cars.
Car finance companies say there are broadly two kinds of vehicle loan defaulters: accidental and intentional.
"It's the second category that has been turned away after the stringent norms were put in place. Earlier, when interest rates were lower it was easier to sanction loans for them," said Rajan Pental, senior vice-president & business manager, auto loans of HDFC Bank. Car loans constitute about 70 per cent of the bank's vehicle loan portfolio.