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In a first for the bank, State Bank of India, the country’s largest lender, is set to link the commission it pays to car dealers, for sourcing loans, to sales as opposed to the current practice of paying them a fixed percentage as a commission, according to a bank’s internal circular, assessed by ET.

The move is aimed at reducing costs and improving profitability of the product, said people privy to the development. The revised payout structure will be applicable for all sourcing with effect from June 1.

In an internal circular dated May 28 issued by SBI chief general manager (CGM) Sukhvinder Kaur addressed to the CGMs of local head offices of the bank, the new structure was notified.

“Dealer payout is considerable part of our expenses in car loan sourcing and heavily impacts the profitability of car loan product. In view of the same, competent authority has approved a performance-based dealer pay-out structure for auto loan sourcing, based on the volume of business sourced by the respective dealerships.”

Under the existing structure dealers would earn a flat 2% (including GST) commission for loan disbursals ranging from ₹50 lakh to ₹15 crore. Under the new tiered structure, they must meet certain disbursal milestones to earn commission.

It starts from a minimum commission of 0.5% (including GST) for disbursals equal to and above ₹50 lakh to less than ₹1 crore and goes up to 1.3% (including GST) for disbursal above ₹15 crore.

The replacement of the flat commission structure, with a performance linked tiered one, could effectively reduce the commission earned by the dealers by half, said an auto dealer.

The move by the public sector lender, which accounts for a fifth of the auto loan market – the second largest after HDFC Bank – may also prompt private sector lenders to rationalise commissions.

Auto dealers earn from selling cars, spares, after-sales service and finance and insurance to customers. “It also weakens our bargaining power with other banks as SBI, by far, was offering the best rate,” said the dealer cited earlier.

“Auto dealers depend on multiple revenue streams for profitability and commission from vehicle finance is an integral one. A reduction in payout by the banks will hit dealers’ profitability…,” said Manish Raj Singhania, president, FADA.

The change in SBI’s payout structure may reflect an increase in non-performing assets, he said. “Instead of reducing payout to dealers, the bank should focus on improving asset quality. Their auto loan rate is on the higher side when compared to peers and they have enough headroom to continue the current structure,” said Singhania.

An email sent to State Bank of India seeking comment remained unanswered till press time.

To be sure, some other public sector lenders have already decided to follow SBI. UBI Services, a wholly owned subsidiary of Union Bank of India, has also pared its structure.

“With recent commission realignment by the major players in the market, it is time for us to resonate with the market sentiment and offer better rates to partners,” said and internal circular issued by Sanjay Bajoria, MD & CEO, UBI Services, on Friday.

  • Published On Jun 1, 2024 at 07:47 AM IST

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