It has often been argued that phasing out old cars will help push the demand for new vehicles. But the experience with replacement of 25-year-old cabs in Mumbai has so far not proved the hypothesis correct.

With the government deciding to phase out old Premier Padmini cabs that have been on the road for a quarter of a century, many thought that the demand for Maruti Omni, which turned 25 last year, would rise.

But so far, a majority of cabbies have opted for second-hand Maruti 800s, though the Zen and the Alto are the favourites. Most of the replacement cabs have a vintage of five-six years since vehicles older than seven years cannot be registered.
The economics works something like this. On road, a second-hand Maruti 800, with the cost of transferring the permit to paying a brokerage to the middle man, costs around Rs 1.3 lakh. If it’s an Alto or a Zen, the cost is around Rs 1.5 lakh (there is a premium on Alto). If second-hand car prices crash after the entry of Nano, then this market will get a further fillip.

While getting a loan for a secondhand car, especially a taxi, is tougher, the drivers go to informal sources in Dadar and Sion to get the vehicle financed at around 18 per cent a year. A default triggers a penalty of Rs 500, which is added to the equated monthly instalment (EMI). Plus, some have decided to make the entire down payment so there is no EMI burden.
In contrast, the cost on an Omni is upwards of Rs 2.5 lakh. So, even if interest rates are lower for new vehicles, the EMI burden goes up as the loan size is higher.

Also, many drivers say that after driving a Premier Padmini for years, they find it tough to deal with a vehicle which does not have an engine in front.

What also prompted drivers to shift to the informal sources of finance was the paperwork involved in getting a bank loan sanctioned. Now, banks have woken up to the opportunity. And, even non-banking entities such as Small Industries Development Bank of India have also decided to enter the market. The financial institution is tying up with Maruti dealers and using the two taxi drivers’ unions like self-help groups to finance loans. As for funding this business, it is depending on a line of credit from a Japanese agency, which came at very nominal rates, for promoting green ventures (CNG-fitted cabs are also promoting green energy, says a Sidbi executive).

If the experiment works, finance may be made available for second-hand vehicles as well since operating costs are low.