TATA'S small car will get cheap insurance cover, but funding might turn out to be expensive. According to lenders, interest rates depend on the borrower's profile, and aspiring buyers of Nano are likely to be those moving up from two-wheelers and hobby customers. The good news is that insurance for the small car could be available for as low as Rs 2,000 and could fall further if Tata assures insurers of the availability of low-cost spares.

The rack rate for a three-year loan for a Maruti 800 is around 14.25% while the actual interest rate for the customer would be around 12.5-12.75%. The current rack rate for a two-wheeler is around 24%. The profile and correspondingly the cost of finance is likely to be in a new category, between these two segments. After viewing the car for the first time on Thursday, most financiers believe there is a huge pent-up demand for the product.

"The interest rate for financing this car will depend on the profile of the customer. It would also depend on how much the customer is also ready to shell upfront. We will also have to factor that two wheeler customers migrating to this car will see running costs to more than double," pointed a senior banker. For lenders servicing smaller auto loans is more expensive as their fixed costs remain the same while the absolute earning is lower.

According to Sandeep Bakhshi, managing director, ICICI Lombard General Insurance, in the absence of data the industry would fall back on the erstwhile motor insurance tariff where insurance rates were a function of the value of the car and its cubic capacity. "With that price we expect a lot of two-wheeler buyers would look at the small car as an option. But the pricing formula would be in the same as for motor cars".

According to Swaraj Krishnan, chief executive, Bajaj Allianz General Insurance, unless Tatas sit across the table with insurers and tell them how the spares are going to be priced, insurers would have to fall back on the old tariff method. Rates for motor insurance has come down from roughly 3% of the car's value to just over 2% following the reduction in tariff. With fire and property insurance rates going into a freefall, the share of motor insurance in the portfolio of insurance companies has crossed 50%. "The business is already skewed towards motor insurance, the launch of Nano will see a rise in the number of motor insurance policies issued in India," said Mr Krishnan. For established carmarkers, selling motor insurance has turned out to be a route to compensate dealers working under increasingly thin margins.

At present the cheapest motor car insurance cover is the one provided for a Maruti 800 which is down to a little of Rs 6,000 following intense competition. Given that the small car is likely to have a fragmented distribution network of small entrepreneurs, insurers would have to look at a different distribution network.