The past, the present and future of Auto Finance Retail.

1. Chapter 5
Retail Finance
1 | P a g e C h a p t e r 5 : R e t a i l F i n a n c e
Retail Finance is the financial assistance taken by the customer for the purchase of his new / pre-
owned automobile from the Financier at the agreed terms of repayment with ownership of the
automobile remaining with the financier till the repayment.
History: Market Governors to Market Players: Span 25-30 years:
Let us go to the past. Before year 1990, most of the purchases were against available funds with the
buyer. Obtaining finance for purchase of the new automobile was extremely difficult, costly and was
predominantly governed by the nationalized banks. The interest rates were high upto 18% and the
finance was never considered as a ‘product’ but favour to the seeker. The lead times were as high as
few months and documentation was extremely difficult.
During the period of 1990-1995, Private Banks and few Indian Captives (visionaries) understood the
immense latent potential in the retail finance and entered in Auto Retail overcoming shortcomings of
the Nationalized and PSUs. The early entrants were BAFL, M&M Capital where they captured the
captive customers of their products to their financial products. The contemporary need of the buyer
was the fast and hassle free finance and therefore these companies were highly successful establishing
themselves. HDFC and ICICI (later followed by Axis) created new rules of auto finance by creating
customised finance products, offering wholesale funding to AR and DSA (Direct Selling Agents) and
bundling with other products like Insurance. Till the year 2002/ 2005 these all companies earned
steady and high margins. There were the times when AR pay-out from the finance companies were
upto 8%. This means AR (Dealer and/ or DSA) used to get commission upto 8% of the amount funded.
The earnings from the Retail Finance were in certain cases as good as the margins earned from the
products. In addition Insurance commissions were high and were managed indirectly upto 50% (and
bit more) on the value of Insurance premium. The most important reason for these heavy margins was
the “non-aware Indian Buyer” in terms of the Auto Retail Finance.
The present times are the times where all financiers are offering extremely competitive rates and the
therefore the pay-outs are limited to 1 to 1.5% of the finance amounts. The major reason of the shift
is “aware India Buyer” due to information availability on internet. Obtaining finance is extremely easy
and in a matter of a day the transactions from log-in to disbursement are complete. Private Banks and
Captives are playing major role in terms of innovative products and wholesale funding to the ARs in
tandem with the Brand (manufacturer). Measures like inventory funding, Credit free periods (30 to
120 days), Flexible repayment options and easy and fast scaling up of the funding if difficult times are
the methods adopted by the captives to support AR. Post year 2000 dominance of DSAs is also
practically over
Retail finance penetration (units sold vs units financed) though depends on the automobile segment,
has reached to a level of 60%. This indicates the huge amount of Auto Finance market size.
The present Auto Retail Market players are classified as:
Financer Example Segment Yield Risk Positioning
PSU Banks State Bank of
India
Middle Income Low Low Large base of
customers
Private Banks HDFC Low to Middle
Income
High High Customer friendly,
wide network,
competitive rates,
Wholesale funding
NBFCs Tata Capital Low to Middle
Income
High High Niche segments,
Flexible Products

2. Chapter 5
Retail Finance
2 | P a g e C h a p t e r 5 : R e t a i l F i n a n c e
Indian Captives Bajaj Auto
Finance
Low to Middle
Income
High High Customized,
subvention products,
wholesale funding
Foreign Captives VWFS High Income High Low Same as above
PSU Banks- Public sector undertaking banks where majority (50%) stake is held by a State and/ or
Central government and listed on the stock exchange. There is a technical difference between a PSU
and Nationalized bank, however for the current scope let us consider those in one group. There are
19 nationalised banks in India (all are PSU) in addition IDBI and SBI are public sector banks but not
nationalized.
Private Sector Banks- Private Sector banks are the banks where majority stake is held by the stake
holders other than government. These stake holders are institutions and/ or individuals.
NBFC: Non-Banking Financial Company is a registered under companies act and the objective is to
provide loans and advances. (Definition is in part and taken only for reference of automobile retail).
They do not have the customers with savings/ current accounts. Tata Capital, Reliance Capital,
Shreeam Transport Finance, M&M Financials are relevant examples. HDFC is a private bank as well
NBFC. Apart from loans and advances their profile is vast and beyond the scope of this book.
Indian captive: Partly NBFCs, where the Indian Auto manufacturers have spread their retail finance
arm with primary objective of supporting the sales of the new manufactured automobiles. BAFL (Bajaj
Auto Finance) is the classic case of the Indian Captive started to support sale of Bajaj made
automobiles, however later expanded to financing of consumer durables and other.
Foreign Captive- The purpose is same as above only the manufacturer is a foreigner. E.g. Ford Capital,
Volkswagen Financial services, Daimler Financial services. Etc.
The next decade however will be completely different in terms of the scale of retail finance, sales
process, speed and the competitiveness. Since the only objective of this book is to give retail
perspective, till time I have avoided to present the macro picture in terms of numbers and volumes
(those are of no consequence to an individual AR), the following numbers are unavoidable to have
understanding of Automobile finance size of India Inc.
(Graph- 2010- 2016- Total loans disbursed in Crore INR)
370
428
621
710 702
868
1124
0
200
400
600
800
1000
1200
FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15
Car Finance INR BN

3. Chapter 5
Retail Finance
3 | P a g e C h a p t e r 5 : R e t a i l F i n a n c e
The above graph is for Car Retail Vs Finance Only and the CAGR over past 7 years is 13%. In line with
Automotive Mission Plan (Narrated in the Chapter 1: Introduction), the auto finance is going to
increase 4 times and the expected changes are:
1. Change in the Retail Finance Sales Process
2. Digital documentation based on PAN and Aadhar Card for instant approvals. An approval time
of 15 minutes will be reality.
3. Digital signing and no paperwork.
4. On line Cross selling / upselling while client servicing by finance companies.
5. Reducing pay-outs, reaching to Zero for AR.
Retail Finance Sales Process:
Sales Process Present Next Decade
Acquisition From converted leads given to
Finance companies, other enquiries
Data base, Capturing user profiles and
spending patterns, Direct Customer
Enquiry.
Need Analysis by Retail Finance/ Sales Team by Sales Team and by online assistance
Negotiations Offer, counter offer, closing Web enabled, various menus, less
flexibility for pricing negotiations.
Documentation Physical collection by the agency Capturing from PAN, Aadhar,
Login By finance company or portal rights
given to AR
Logging in directly by the customer, AR
Sales Team
Approval By email, to AR Within 15 minutes to the customer
and his choice of AR. Bank
authorization by the customer for EMI.
Disbursement Delivery order followed by bank
transfer/ adjusting from trade
advance. Not on Sundays and
holidays.
In 1 to 2 hours, in the account of AR,
applicable on 365 days and 24 X 7.
Delivery ( Part of
the sales Process)
Ceremonious way Directly from warehouse, plug and
play, login by customer for warranty
and usage
Client Servicing/
Cross and Up
selling
Once a while by mass messages,
emailers, some events.
Regular checks by the call centre,
mapping customer’s enhanced needs.
Collection and
Recovery
By automated process monitored
by the financier
By automated process monitored with
life cycle management
Acquisition Not covered by process, but by
chance
By process, monitoring and assisting
for the upgrade/ additional purchase.
Documentation:
Today while offering finance, most of the ARs have separate Retail Finance team. Sales team
handovers the customer after finalizing the deal to the retail finance team. Many ARs, especially of
two wheelers and entry level PVs give their space to the NBFCs or Private Banks. Most of the sales
team is not aware and thoroughly capable to handle all queries and documentation required from
finance quote to disbursement. In the attached CD, you will find finance calculators and the reader
is requested to play around with that using various permutation and combinations of down payment,
tenure, subvention etc. After understanding this, the next step is to understand the requirement of

4. Chapter 5
Retail Finance
4 | P a g e C h a p t e r 5 : R e t a i l F i n a n c e
the correct documentation. The table below will show the list of documents, their source, need and
the future aspects.
Document/ Step/
Need
Present Next Decade
Finance Quote After discussions Retail
finance Team
10 min Online obtained after giving
basic details
2- 3 min
Eligibility for the
required Loan
amount
IT Returns, Bank
statements, document
giving sources of other
income.
Customer
dependent. 2
to 7 days.
Directly extracted from PAN
card number.
5 min
Log in the file Manually or through
finance company portal
Online by the Sales Team
or by the customer
5 min
Approval For the amount of loan 2 to 6 hours
except
holidays
On line reply by the finance
interactive portal
5 min
KYC Documents Address proofs Customer
dependent
Directly extracted from
Aadhar Card
5 mins
Submitting KYC Upload on portal by Fin
co
30 mins
aprox
Nor required 0 min
Agreement
Signing
To meet customer again Gap in
meeting
Immediately after KYC
upload, digital signing
5 min
PDCs By customer 15 mins Bank Mandate by linking
agreed EMI date and
amount
5 min
DO by Finance co
with
Hypothecation
advise
AR receives by email 3 to 4 hours Instantly after above step 5 mins
Disbursement AR receives disbursement 3 to 4 hours
except
holidays
Instantly transmitted to the
AR
5 to 10
mins
Total Time Anything between 2 to 15 days. One hour from finance quote during
one meeting with the customer.
Most of the finance companies, Private Banks and NBFCs are having the option to apply for loan with
income details on their websites. However those are only used for acquisition (step 1 of the sales
process). The linking of PAN and Aadhar card gateways to these companies to extract required data
of Income, CIBIL score and address and identity proofs is the need of time. With this signing of the
agreement “on line” and allowing the financier for deducting EMIs giving bank mandate is the next
step. Most finance companies are ready with similar solutions and after certain approvals disbursing
the loan in one hour after finalization will be a reality. The only requirement is a customer should have
his PAN and Aadhar card.
The Problem after completion of Tenure:
The Automobile is registered by AR hypothecating to the Financer. After completion of the loan tenure
and complete settlement, the hypothecation is required to be removed from registration document,
transferring singular ownership to the customer. This is indicated in DO. The completely ignored
aspect by one and all finance companies is the automated process for this parameter. I have seen

5. Chapter 5
Retail Finance
5 | P a g e C h a p t e r 5 : R e t a i l F i n a n c e
many cases where obtaining dues clearance certificate and removing hypothecation is burden and
time consuming aspect for the customer. Since this interfaces Regional Transport Office, digitalization
of those is the prime responsibility. In today’s situation where after delivery of the new automobile
and paying RTO Tax, time upto 2 to 3 months is required to get the RC card. Therefore this part is wish
list for the Indian consumers.
Life Cycle Management: Cross and Upselling
After acquiring a customer for finance, the next product that is cross sold is Insurance. Leading Private
sector banks are having their own Insurance wing and the Captives are having tie ups with leading
Insurance companies. However Insurance from RA perspective is incomplete unless we understand
the impact on Insurance Claim and assistance provided by Insurance companies for workshop. This is
called SLA (Service Level Agreements) and we will focus on this in next Chapter; Insurance. At this
juncture we are concentrating only on Upselling the Finance customer and from that perspective,
Insurance is the first product. The next part is to upsell Extended Warranty, Service Plan and
Accessories. Most financiers are offering finance of these VAS at the same rate of interest. For a
customer who has limitation of down payment, financing VAS is the best proposition.
While automated collection and regular EMI collection, customer relationship can remain in touch
with the customer for his additional purchases and upgradation of his automobile.
Power of digitalization will ensure loan approvals and disbursement within one hour.