Is financing this car going to be any different from the point of view of financiers? After all, is it not akin to financing a motorcycle from the premium segment? Then why should auto financiers including banks need to design a separate set of rules for financing the Nano, as reported in a section of the press?

Well, for one, the Nano is a dark horse. If the borrower fails to service the loan account for whatever reason, prompting the financier to repossess the car, it should be possible for the financier to find a buyer for the repossessed car. In other words, the car should be good enough to serve the second owner. This aspect of the car can be gauged only after it has been on the road for some time. If the car is good enough for the second innings, finding a buyer should not be difficult. Also, pricing the car for the second-hand market should not be difficult in such a case. After all, the price has to be attractive to the buyer as well as the seller. It will be, if it is good enough for the second innings. If these factors are favourable, to that extent the financier will feel relieved. After all, selling the car to the second owner is not a difficult exercise, since it can be easily transferred with appropriate documentation.

In view of these reasons, the financiers should approach Nano financing rather cautiously during the initial stages. This was true of Maruti too when it was introduced in the market in the 1980’s. Premier Padmini used to rule the roost those days and believe it or not, financiers used to bribe the marketing officers of the former’s dealers to ascertain the names of those who had booked Premier Padmini cars with the intention of selling them at a premium. So dreary was the Indian automobile scenario until the early 1980’s when Maruti came into the picture.

These days, if you want to sell your Premier Padmini, you have to pay the buyer. I have seen its shell being used as kitchen garden with good effect in certain suburbs of Bombay, sorry Mumbai (may Bal Thackeray pardon me). However, after a few hiccups, Maruti asserted itself, sent Premier Padmini into the oblivion and the rest, as they say, is history.

But our car financiers, particularly those from the unorganised sector or those who have no exposure to car financing whatever, should avoid making the same mistake that to some extent led to the mortgage finance – led sub-prime crisis in USA. This is relevant in the case of Nano because of the price factor. Since it will cost only Rs 1. 3 lakhs on the road and people these days do not hesitate to borrow to buy cars, the demand for financing Nano will be on the high side. Financiers, not inclined to let go of such an opportunity to book business may go overboard by funding those who are not creditworthy. If they believe that they can cover the resultant risk by raising their lending rate in such cases, they will meet the same fate that their US counterparts met.

When the borrower is not creditworthy, it is unwise to believe that by slapping a higher rate of interest, the risk involved in financing the said borrower can be eliminated. To begin with, our financiers will do well to adhere to a conservative loan-to-value ratio. They can cap the loan at 60 percent of the on-the-road price of the car which implies a margin of 40 percent. This margin can be reduced over a period of time if the car acquits itself well on the road. If the borrower insists on a lower margin (and hence more loan), it is advisable to obtain collateral (additional security) to mitigate the risk.