Automotive sales in India for the fiscal ended March 2011 were 26%. But rising interest rates on loans coupled with moderating automotive sales peg the industry growth at between 13 to 14% for the current fiscal. Since most vehicle purchases are bankrolled, the auto finance business is also expected to mirror vehicle sales.

"Our fortunes are very closely linked to the automobile industry. The industry is showing the first signs of a slowdown, coming off two successive years of high growth. Commercial vehicles sales are likely to be impacted on account of increase in price of vehicles, imminent increase in diesel prices and higher interest rates," said T T Srinivasaraghavan, MD, Sundaram Finance.

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Sundaram Finance, a leading NBFC with a significant presence in commercial vehicle (CV) and car finance business, is expecting a decline in the demand for Car loan in the current financial year. The NBFC, which has reported 25% growth in its disbursements last year, is expecting lower growth this year. "While we expect modest topline growth this year, we are confident of maintaining profitability at a healthy level," he said.

While the sector has registered 26% growth last year. The slowdown is quite evident from the monthly sales data. In April, (as compared with April 2010) three major automobile companies which include TVS Motor, Maruti Suzuki and Tata Motors have reported negative sales growth.

Ashok Khanna, head of auto loans at HDFC Bank, feels that the segment may bear the brunt of increase in the price of vehicles as well as rise in the interest rates. "This year is going to be a challenging year for the auto loan sector. There is already a stock pile-up with the dealers and footfalls have also come down. Compared to 30% growth last year, the automobile finance this year may grow only by 12-13 %,"Khanna said.

In the last one year, while the petrol price has gone up seven times by almost Rs 7 a litre, interest rates on auto loans have also increased by 100-150 bps. All the major automobile companies have marginally raised the price of their products in the range of 1-2 %. With headline inflation showing no signs of decline, experts believe that interest rates and prices of automobiles will only increase further, thereby laying further stress on auto finance business.