The auto finance market in India has matured over time, making it one of the most developed markets in Asian region. It is a growing market, with 74% finance penetration, and sub 1% Non-Performing Asset (NPA) levels, according to the EY Report: Building a strategic and profitable auto finance portfolio in India.
India is a large automotive market, expected to grow at a CAGR of 13 per cent by value during FY16-FY26 to reach $300 billion. By 2020, India’s vehicle penetration is expected to increase by 50 per cent albeit against a low base. With a population expected to hit 1.4 billion in 2020, and majority of the population belonging to the driving age, it provides for one of the world’s most attractive auto markets. The growth in the automotive market is expected to be driven by India’s strong demographic, socio-economic fundamentals as well as well-developed industry fundamentals, such as credit infrastructure.
Captives have emerged as key contenders in the Indian automotive finance landscape – 75-80 per cent finance penetration of OEMs with captives has been higher than that of the overall market, primarily driven by innovative products and campaigns. Captives have been successful as they add value to the entire ecosystem – OEMs, dealers and customers – particularly by their potential to offer differentiated financing schemes with relatively high levels of customization.
Rakesh Batra, Partner and India Automotive Sector Leader, EY, said: “The Indian auto finance market is a key enabler of growth for the automotive market. Both private and captive auto financiers are focusing on building a more holistic relationship with both car buyers and dealers. There is a significant scope of innovation in improving customer experience, customer lifecycle management and digital operations.”
Fali J. Hodiwalla, Partner, Financial Advisory Services, EY, said: “The Indian auto finance market has seen a significant transformation. Key value drivers for the business have increasingly moved towards building a more holistic relationship with both car buyers and dealers, requiring car financiers to relook at their auto business strategy.”
The key drivers to the auto financing strategy, which can significantly enhance the portfolio profitability, are:
* Choose the right segments and target them with the right customer value propositions
* Leverage used car financing – to reduce product life cycle, drive new car sales, enhance brand value and improve yields
* Refinance the existing customers, cross-sell and bundle
* Innovate dealer financing to drive retail volumes by leveraging the wholesale-retail linkage
* Explore leasing as it offers a high potential market for captives
* Deploy templatized and micro market model-based application scorecards to drive risk-based pricing
* Create a best-in-class customer experience by enabling instant approvals
* Keep funding costs under control through a mix of short- and long-term funds, and parent guarantees
* Auto financing ROA can touch close to 3% with some or all of these initiatives
It is imperative that Banks and NBFCs position auto financing as an anchor offering and build scale in the business through the right OEM partnerships.
The other key findings are:
* India has a healthy portfolio LTV (loan-to-value ratio) of 72 per cent, on par with the developed countries
* The new passenger vehicle financing market is expected to more than double in size to Rs. 1,600 billion during the period FY2015 to FY2020
* Promising future for the auto finance industry – three-five per cent increase per annum in ticket size of cars and growth in finance penetration from 74 per cent to 80 per cent
* Improved consumption: 2.5 times growth in consumption by 2025
* Favourable demographics: 925m working age population (15-64 years) by 2020
* Growing middle class: 46 per cent middle class population (income level 0.2m – 0.5m) by 2025
* Approximately, 80 per cent of customers would consider buying a car higher than their budget if attractive financing schemes are available, and 58 per cent of dealers believe differentiated finance products can lead to more than 10 per cent increase in sales
* Vanilla loans continue to dominate the Indian market landscape with approximately 95 per cent market share, as their ease of availability and simple structure attracts majority of customers
* Almost 70 per cent of the compact car owners are under 35 years of age, 36 per cent of the premium car owners have bought their cars exchanging their old ones
* Forty per cent of customers change cars within four to six years, followed by approximately 30 per cent, who do so in two to four years. 40 per cent of the used car buyers are below 30 years of age
* 50 per cent of dealer profitability comes from servicing and accessories, followed by insurance, new car sales and then finance commission
* Inventory funding is over 70 per cent of a typical dealer’s funding requirement, making it the focal point of captive-dealer relationship
* Rs. 126b potential leasing opportunity from the corporate segment assuming leasing penetration reaches at par with international markets
* Rs. 1m is the average leasing ticket size as compared with average PV loan disbursement of Rs. 380,000. 10-15% is the projected growth in PV leasing till FY20. 10-15% net benefit to customers of lease over loans and expected to increase post GST implementation assuming a favourable rate structure for the automotive sector
* 57% of the surveyed dealers recommend financing on the basis of the customer profile and TAT’s (Turnaround Times) for loan processing