The recent reduction in the goods and services tax (GST) rates on select vehicles to 18% from 28% has revived retail sentiment, sparking an uptick in passenger vehicle sales and demand for loans to finance them, four lenders said.

In September, India's banking industry saw a vehicle loan growth of 7.3% year-on-year (y-o-y), nearly half of the 14% expansion witnessed in the same month a year ago, according to the Reserve Bank of India's monthly sectoral data. Vehicle loan growth has been losing steam through the current financial year. For the first six months of the current financial year, year-on-year vehicle loan growth has been in a range of 7.3-10.8%, as against a 13.9-17.2% rise in the same period a year ago.

However, bankers' post-results calls with analysts suggest strong growth momentum in vehicle loans October onwards, following a major overhaul of the country's indirect tax system.

While loans for cars and two-wheelers are picking up, the commercial vehicle segment remains under pressure due to borrower over-leverage and sluggish economic activity.

State Bank of India, Axis Bank, IndusInd Bank and Shriram Finance, all with significant auto loan portfolios, reported clear signs of recovery in vehicle demand in the September quarter. This comes after the GST reforms, which became effective from 22 September, eliminated rate slabs of 12% and 28%, creating a two-slab system with products and services taxed at 5% and 18%. The move led to significant GST rate cuts on certain categories of cars, boosting their sales.

While the tax cuts boosted retail activity, bankers cautioned that these are still early signs of a rebound in vehicle loans, and its sustainability depends on demand holding through the festive season and beyond.

Early signs of recovery in car loans

State Bank of India (SBI), the country's largest lender, said the bank had seen a "phenomenal pick up" in auto loans within days of the GST reduction.

"In auto loans, not only have we increased the growth in the last 7 to 8 days post-GST, we also acquired market share in auto loans," Chairman C.S. Setty said after announcing the bank's September-quarter results on Tuesday. SBI's auto loans grew nearly 10% y-o-y to ₹1.28 trillion during the quarter.

In the September quarter, commercial vehicle sales have gone up by over 8% y-o-y to 240,000 units. By contrast, passenger vehicle sales fell 1.5% to 1.04 million units, according to data by Society of Indian Automobile Manufacturers (Siam). However, the passenger vehicle segment showed signs of recovery towards the end of the quarter, with September sales up by 4.4%, aided by the GST cuts, improved consumer sentiment, and the onset of the festive season, the industry body said.

The two-wheeler space recorded a growth of over 7% y-o-y, taking the total sales to 5.56 million units in the July-September period. Three-wheeler sales rose nearly 10% to 220,000 units, and tractors sales grew 15% to 239,000 units. October auto sales numbers aren't in yet, as Siam typically releases the monthly auto sales data around the middle of the following month.

Axis Bank's chief executive Amitabh Chaudhry told analysts on 15 October that the GST cut had led to "a spurt in bookings" across some auto categories soon after its implementation.

"We've seen some spurt in bookings post-22 September... but these are early days and that increase must have happened because of pent-up demand for the month of September," said Chaudhry. "We think it could lead to good outcomes in general for the industry, but we're obviously watching it closely."

Axis Bank's auto loans have been declining since the start of FY26. At the end of the September quarter, the private sector lender's auto loan book fell 2% y-o-y to ₹57,487 crore.

GST rate cuts appear to have unlocked deferred demand that had been building up through most of September, when customers postponed purchases in anticipation of lower prices, bankers said.

IndusInd Bank's vehicle loan disbursements dropped 4% y-o-y in the September quarter (Q2FY26), as customers waited for the new rates to kick in. But advances rebounded strongly after 22 September, according to the bank's new managing director and chief executive officer Rajiv Anand.

"The vehicle business saw a dip in disbursements between GST cut announcement till the implementation, as customers deferred their purchases. The disbursements, however, have picked up significantly post-22nd September and we see the traction continuing in this quarter as well," Anand told analysts on 18 October.

Vehicle purchases were further aided by the ongoing festive season, he said, adding that the bank expects the demand momentum seen in late September to continue, supported by festive season, GST reforms, strong monsoon and kharif harvest and a broader pick-up in economic activity.

IndusInd Bank's vehicle finance book rose 6% y-o-y to ₹96,208 crore in the quarter ended September.

Shriram Finance, one of India's largest vehicle financiers, said sales have been particularly strong for two-wheelers, tractors and small passenger vehicles. "The quarter has been quite good for automobiles," executive vice-chairman Umesh Revankar told analysts on 31 October.

Even though passenger vehicle sales have declined 1.51% in Q2, demand for this segment has been very good, especially for base models, Revankar said. "We expect the third quarter, passenger vehicle credit growth will be significantly higher."

In the September quarter, Shriram Finance's passenger vehicle loan portfolio rose almost 22% y-o-y to ₹59,550 crore.

Revankar said that rural demand is picking up, buoyed by higher minimum support prices for key crops, and a strong kharif harvest, which could sustain growth in tractor and two-wheeler loans through the second half of the ongoing financial year.

However, the benefits of the GST cuts haven't been felt evenly across the segments. According to Revankar, manufacturers have used the tax cuts to reduce discounts, rather than pass on the entire benefit to buyers, especially in the commercial vehicle segment.

"In commercial vehicles, the effective cost for customers has not changed much," he explained. "OEMs (original equipment manufacturers) reduced discounts from 10% to around 2%, offsetting the 10% GST relief. So, the net benefit to buyers is minimal."

Commercial vehicles stay in slow lane

Despite a pick-up in commercial vehicle (CV) sales, lenders remain cautious about asset quality in this segment. Kotak Mahindra Bank's managing director and chief executive Ashok Vaswani said the bank has tightened underwriting standards and has witnessed lower disbursements in this space.

"We continue to be cautious in the retail CV segment, where we've highlighted some build-up of stress," Vaswani told analysts on 25 October.

Vaswani said that the CV industry saw a 10% y-o-y and 8% sequential growth on account of improvement in small commercial vehicle sales and partially due to the higher wholesale numbers in the last week of September because of the GST cuts.

Industry experts also concur that the stress in commercial vehicle loans stems from the broader economic weakness and borrower over-leverage.

"Delinquencies are a little bit on the higher side," said Karthik Srinivasan, group head, financial sector ratings, ICRA. "See, your commercial activity, everything has to pick up. Transportation requirements have to pick up to see much more traction on that front."

Srinivasan said that car loans may see an immediate pick-up, but commercial vehicle demand could take longer to recover.