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Middle class sinks under EMI load (Equated Monthly Installments)By Unregistered Visitors, Section Finance & Taxes
Source:economictimes.indiatimes.com
NEW DELHI: Call it the equated monthly instalment (EMI) squeeze. Galloping real estate prices and hardening interest rates are making things difficult for the great Indian middle class. On a like-to-like basis, factoring the change in prices of three big-ticket items for a household -- house, car and consumer durable -- along with the change in the interest rate regime, the cumulative EMI for a household has gone up from Rs 24,500 over the last three years to Rs 51,000. Phew! And this is assuming you have saved enough to cough up the upfront and margin payments. So, even if you are part of the double-income-no-kid (DINK) club and plan to set up your home afresh, don't even think about it unless your take-home salary is more than Rs 60,000 per month. ET crunched some numbers to find out how the EMI outgo of an average household has changed over the last three years for acquiring three broad big-ticket items -- house, car and basic consumer durables. For the analysis, we took into account the price of a two-bedroom apartment in a city like Delhi which has shot up from about Rs 15-20 lakh to Rs 35-50 lakh over the last three years. Even if we compare a Rs 15-lakh loan versus Rs 35-lakh loan at the different interest rates for a 20-year loan, the EMI has moved up sharply from about Rs 12,000 to Rs 39,000 per month. While HDFC surprised with its financial numbers witnessing a boost from home loan portfolio, it could be possibly due to the lag effect of consumers already having decided to purchase the house. This could easily change over the coming quarters and the negative impact could be bubbling over other areas. One such indicator could be the fact that State Bank of India's net non-performing assets in the home loan sector showed a rise in 2006-07. Like-to-like comparison for automobiles is difficult given the discounts on offer at the dealer level. However, if we take a Rs 3-lakh loan for a four-year period for a hatchback -- which is what an average consumer goes for, the EMI would have moved up by around Rs 400-500.
What is pinching customers are the frequent increases in financing cost. Auto loan rates have gone up by 5% in the last one year, says Ashok Khanna, executive vice-president, HDFC. "Of that, 2.5-3% increase has happened in the last four months alone." So how much have rack rates gone up in the longer term? HDFC's B-segment rack rates hovered around 10-10.25% back in January 2006. For bigger mid-size cars, the rates were 9.5%-10%. One-and-a-half years on, that has increased to 14.75% for an entry-level compact car like the Alto. For bigger cars, it's around 14.5%.
Even after the proposed reduction in dealer incentives by some of the top financiers (ICICI and Kotak have announced their decision, HDFC will take a call early this week), the rack rates will have come down to 13.5-13.75% -- a good 300-400 basis points higher than the 2006 level.
This translates into an increase of at least Rs 150 per lakh per month on a Rs 3-lakh loan. If that seems small, its total cumulative pinch isn't -- it works out to an increase in the annual EMI outgo of Rs 5,400 or Rs 21,600 over the entire loan period of four years. In other words, it's around 7-8% of the total price of a car like the Alto. As for consumer durables, we took into account a 29'' flat screen CTV, a standard frost-free refrigerator, a fully automatic washing machine and a window airconditioner (AC). Durables follow a 0% structured finance model which includes four months' down payment and the balance rolled over into eight EMIs. Therein the combined EMI of the four products would cost a consumer about Rs 4,500 today, compared to Rs 5,500 three years back. This is a reflection of the drop in prices of electronics goods. For instance, while the price of a refrigerator and washing machine is more or less at the same level as in 2003, the price of television has dropped by about 35-40% and that of an airconditioner is down by about 10-15%. The question which follows is whether the unwieldy EMI for purchasing a house would result in a positive spin-off for the other two asset categories? On the face of it, automobile companies and electronics brands should be encashing much more moolah if consumers postpone their house purchase plan. But as LG Electronics' vice-president (sales & marketing) Girish Rao cautions, there might be a flip side to it. "While it may be true that those who haven't purchased the house might shift their consumption towards other categories, there is also the category of consumers who might have already purchased their house. These consumers would now be facing higher EMIs and this group might have to postpone or outright let go of their plans to buy a new television or a refrigerator." This could be significant as the penetration rate of consumer durables is much higher compared to a car. Therefore, replacement demand from existing users of the product is very important for growth. The durable industry, which has already been facing a slowdown for the last few years, had just started showing some signs of revival and the net impact would be visible over the next few months.
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