High Interests Offered by Automakers Criticized

EghtesadOnline: A lawmaker has criticized automakers for offering high interests on their pre-sale contracts, saying that the gaping difference between auto contracts’ interests and banks’ deposit rates has caused problems for the economy and the banking system.

News ID: ۷۷۴۱۶۱

25 February 2017

“SAIPA and Iran Khodro are offering 28% and 26% interests on pre-sale contracts, whereas the cap for banking interest rates is set at 15% ... This is not legal, because only the banking system is permitted to offer banking services,” Ali Akbar Karimi, a member of Majlis Economic Commission, was quoted as saying by Banker.ir.

“Attracting bank deposits [by offering higher interests] is against banking regulations. Minister of Industries has been informed about the issue, but the problem has not been solved yet.”

Automakers usually reward car buyers with considerable returns on their down payment. Buyers receive the purchased vehicles in 3-24 months at lower prices. The interest is calculated on a daily basis, making it more appealing than interests offered by banks, Financial Tribune reported.

“Unfortunately, a car is considered as a form of investment in Iran,” the lawmaker said. “Many people put their resources into the auto sector due to it special returns, causing imbalance in markets.”

Karimi noted that the consumer protection law should be reformed to set a limit on auto investments.

Further Concerns

Economists and bankers also have been expressing concerns over automakers’ special offers.

Mohammad Reza Jamshidi, secretary-general of the Private Banks and Credit Institutions Association, said people should be cautious about their involvements in auto contracts, since “these schemes are not feasible”.

“Automakers might fail to meet their commitments due to the sector’s low output and the low demand for manufactured cars,” he said.

Ahmad Hatam Yazdi, analyst and former head of Bank Saderat Iran, had earlier warned that since the risk of investment in the auto sector is higher than putting the money in the banking sector, “returns should be higher”.

“There would be no need for employing such techniques, if banks could provide automakers with sufficient resources,” Khabaronline.ir had quoted him as saying.

Bahaoddin Hosseini Hashemi, a banking expert, also said, “High returns on auto pre-sale contracts help foster the sector, but it would result in an auto market bubble.”

“The growth in demand side of the market should be natural,” he said.

Mohammad Kazem, an expert on vehicle leasing, also called on the Central Bank of Iran to take charge of setting rates for automakers’ contracts.

“Automakers’ activities cannot be considered illegal, as long as CBI chooses not to intervene,” he said.