Despite the fundamentals of vehicle finance remaining same, rise of EVs will bring new dimensional changes in this sector.
Vehicle finance market in India has suffered a massive blow due to the economic meltdown running for last two years and lately the Coronavirus pandemic has added salt to the wound.
According to a research, the global vehicle finance market size was valued at $1,290.7 billion in 2019 and is projected to reach $2,334.3 billion by 2027, growing at a CAGR of 14.3% from 2020 to 2027. India, being one of the largest and fast-growing auto markets in the world and fueled by surging auto sales is expected to play a key role in that growth story for the vehicle finance sector.
However, the Covid-19 pandemic certainly served a blow to the vehicle finance market of the country. According to auto dealer’s lobby, around 80% of the consumers opted for vehicle finance to buy cars and two-wheelers prior to the pandemic outbroke. However, with the economic activity across the world collapsed due to the harsh lockdown, millions of people have lost jobs and witnessed salary cut, resulting in lenders finding them not creditworthy anymore.
The domestic vehicle finance sector has lending stakeholders like PSU banks, private banks and NBFCs. According to the industry stakeholders, presently, there are no liquidity concerns in the vehicle finance sector, but banks and NBFCs are cautious because the moratorium on repayment of loans has ended. There are speculations on the surge of bad loans.
Earlier, banks, that account for the largest chunk of the vehicle finance sector, used to provide 80-85% of the on-road pricing of the vehicles. However, in the changed scenario, the percentage is likely to change.
To learn what’s happening in the Indian vehicle finance segment, Autofintechs spoke to Apoorv Goyal, Chief Manager, Sales & Marketing – Passenger Cars, Mercedes-Benz Financial. He spoke about the status and changing tide of the Indian vehicle finance market.
Edited excerpts below.
Q. Financing crunch has been a major issue in the Indian auto market for the last two years since the economic meltdown started. What’s the current status of the Indian vehicle financing market now?
Yes, in last 2 years the Indian auto market has been adversely impacted by issues plaguing the NBFC sector and other economic setbacks by limiting the credit availability where financing is a key enabler with penetration levels so high that it is almost a norm.
These economic events being referred to have affected the industry in two primary ways, firstly increasing the interest cost in an already expensive setup and restriction on the extent of funding commonly referred as LTV (Loan to Value) creating entry barriers for prospective buyers. The influence of economic events is very different in post COVID times.
There is plenty of liquidity with banks driving down interest rates to the lowest witnessed in recent times. Financial institutions are and shall exercise caution with credit underwriting, but with a rebound in economy, jobs and businesses, it is only expected to improve in quarters to come. In my opinion, the resurrection of the automobile and auto finance industry is on course or even better than anticipated a few months back.
In my opinion, the resurrection of the automobile and auto finance industry is on course or even better than anticipated a few months back.
Q. Is luxury vehicle financing market in a better position now? Can you put some light on this?
Like mass and premium segments, the luxury car market too is seeing promising signs of recovery so far and has been adequately serviced by financiers. Yes, the setback has changed a lot of things and financial institutions are exercising caution in credit underwriting on account of the significant sums involved but I would term this as a routine and calibrated response to the prevailing situation.
With an increase in liquidity, I don’t see any major challenge for luxury and premium car prospects for their credit requirements and market growth shall be supported largely for the financing needs.
Q. How has vehicle financing changed in the last few months? Is it helping the crisis-hit auto dealers?
There is undoubtedly a positive change in vehicle financing industry in the last few months. Remarkable rebound by the auto industry itself is an indicator of confidence expressed by the financiers who play a pivotal role as enablers for both enquiry & sales. Two fundamental changes or adaptations worth highlighting here are quick adoption of technology and revamped product offerings.
Almost all OEMs along with financing partners came up with deferred payments, EMI holiday schemes etc to ignite customer interest and address their concerns regarding short term uncertainty. Dealers were hit by high inventory holding costs and other operating costs. The critical challenge was stock liquidation, and these initiatives certainly helped in taking a step towards solving the problem.
Q. How and what are the technologies that are helping in vehicle finance providers?
Vehicle finance providers have benefited significantly from the broad innovation already happening in the evolving fintech industry. Technological solutions are being applied to the entire spectrum of the value chain from customer acquisition to contract closure.
At the front end, we have seen so many institutions introducing online applications, approvals and even paperless disbursements in many cases and other innovative ways of customer engagements successfully inducing sales.
Remarkable to note is what happens at the backend, the use of advanced analytics and AI for risk management, process automation and lifecycle management tools are all helping these institutions with unprecedented agility to adapt to situations swiftly and also adding to the bandwidth.
Q. NBFCs have been losing the car loan market share to the PSBs due to rate war. How the NBFCs are trying to turn the tide in their favour? Can you put some light on this?
The price differential has always existed between banks and NBFCs, and that shall continue to exist. This price differential is structural and is not a recent phenomenon.
For short terms, there is a possibility that the differential between two widens due to latency in the reflection of cost benefits to NBFCs. The opportunity lies in sticking to the original purpose & scope of NBFCs which has always been to ensure credit growth by addressing under-served sections. There is a sizeable market where credit availability is a more significant challenge than price sensitivity providing enough space for NBFCs to operate.
With Luxury vehicle financing, it is a bit different and complicated as the target section is the same and desired by both banks and NBFCs. The best bet for NBFCs to shine in this area is an unprecedented demonstration of service offerings and outpacing banks in innovative/engaging technology adoption.
I am also of the view that how these financial institutions adapt to the behavioural changes with the upcoming generations shall define their future. The luxury car market has also started manifesting early signs of these preferential shifts. NBFCs should begin exploring how they can create a space of their own with the transition to shared mobility and other evolving customer preferences. Future proof yourself!
Q. The loan moratorium announced by RBI eased pressure on the borrowers, but NBFCs claimed that they didn’t receive the same benefit from their lenders, banks. What’s your take on this?
NBFCs claims are correct. Unlike banks, non-depository NBFCs don’t have their sources of funds and thus borrow from institutions and lend to end customers. The extension of the moratorium facility on EMI payments plugged the inward cash flow from customers who availed the offering.
At the same time, there was no relief on outward commitments creating an imbalance. The situation can potentially create cash flow and other issues adding even more to the problems of already troubled NBFCs. The condition can potentially become alarming if sizeable accounts that availed the moratorium facility turn delinquent. Thankfully, early indicators don’t seem that grim.
Q. Electric vehicles are likely to see a substantial rise in the near future? Is the vehicle finance providers opting in to adopt new strategies to tap into that segment?
Fundamentals of vehicle financing shall continue to be the same, but yes, EVs will certainly push finance providers to rethink the business strategy and approach. Residual values and customer outlook towards pre-owned EVs shall be critical factors determining risks.
Also, it shall be interesting to see if the Indian consumer gives up their inclination towards ownership and retail financing for other models like leasing, subscription and shared mobility with EVs. Vehicle financers, along with OEMs, shall play a pivotal role to drive strategy for mass adoption of EVs.
(The responses are personal opinion of Apoorv Goyal and not from official perspective.)