Finacle - Automobile Financing & Loans | Industry Trends In India


Published on

A walkthrough on emergence of Automobiles Finance & Loans in India. Read more to know how the industry has adapted with the ever changing trends and significant role of Banks in it.

Published in: Economy & Finance

Finacle - Automobile Financing & Loans | Industry Trends In India

  1. 1. India’s changing middle class tasteswhet the appetite for automobile financeThought Banking Solution | Systems Integration | Consulting | Business Process Outsourcing
  2. 2. India’s changing middle class tastes whet the appetite for automobile finance Henry Ford invented the first automobile, Automobile loans were not common in India right? Wrong. The first automobile was actually until the 1990s, and were restricted to the rich. invented by Sam McLaughlin, a Canadian from Ordinary citizens did not or could not take loans Oshawa, Ontario. He went into partnership because they didn’t earn enough or thought with American David Buick to mass-produce that it was less important to own a car when McLaughlin-Buick vehicles, a year before the compared to other essential needs. They feared Model ‘T’ arrived. Subsequently, car registration the risk or were more interested in saving for climbed from 178 in 1903 to just over 2,000 by the future. All that changed with the liberalization 1908. Selling cars was a challenge during this of the Indian economy around 20 years ago. period, until an extraordinary salesman and entrepreneur, William Durant, entered the This paper analyzes the impact of affordable fledgling automobile industry. William ‘Billy’ automobile loans in the middle class consumer Durant founded General Motors and was the first mindset and its long term impact and to introduce automobile financing. implications on the Indian society. Consumer perception and scenario in the 80s’ The consumer mindset of the 1980s was one of If one analyzes the balance sheet of the banks caution and savings orientation. Government in the early 80s, the percentage of vehicle loans jobs – low paying, but secure – were preferred. (individual personal vehicles) in the books of People couldn’t aspire beyond one house, and the bank, when compared to the overall asset spent their entire working life paying for it. size of the bank was very less. The number of Owning a vehicle was low priority and the products under vehicle loan category offered absence of easy, low cost vehicle finance was a by banks and the demand for loans from further dampener. customers was very less. Emergence of automobile finance in India and role of banks The liberalization of the Indian economy in the power of the middle class manifold; people early 90s’ brought in a host of foreign investors who couldn’t afford a single vehicle, were now and banks which revolutionized the growth buying luxury cars or expensive two -wheelers. of industries across the economy. There was The automobile industry responded to the special focus on the automobile industry, which robust demand with both high-end and produced passenger cars and multi-utility affordable models, and approached banks and vehicles, since it contributed significantly to the financial institutions to offer vehicle finance GDP growth of our country. at competitive rates. Both these measures accelerated the automobile industry’s growth. Job opportunities in automobile, IT and other industries increased the wealth and purchasing02 Thought Paper
  3. 3. Consumer perception and scenario fromthe 1990s’ onwardsThe trend started changing in the early 1990s. has to pay up to five EMIs in advance and theThere were better job prospects because of the balance through post-dated cheques across theprivatization of the Indian economy and the tenure of the loan.disposable income of the middle class was high. Security Deposit Scheme: Under this scheme,With the availability of a plethora of easy options the borrower is required to make a securityand auto loan at reasonable rates of interest, deposit against the loan amount, which isowning ‘the dream car’ was now a reality for refunded at the end of the tenure. This is thethe average middle class consumer. The above most widely used type of loan.factors have contributed significantly inchanging the customer mind set from being Hire Purchase Scheme: This is an agreement to‘risk averse’ to being seen as ‘risky investors’, as let the car on hire, under which the hirer hasthey started to purchase houses and cars the option to purchase the car subject to certainthrough home and car Loans. conditions. Hire purchase is mostly offered by non-banking Finance Companies.Indian banks and financial institutions offered avariety of automobile loans, as listed below: Lease Financing Purchase: A lease is a hiring contract between the owner of an asset (theMargin Money Scheme: Under this scheme, the lessor) and its user (the lessee). The ownershipborrower is required to pay margin money of at rests with the lessor, who gives the right ofleast 10% of the total loan amount, along with usage to the lessee for an agreed duration inone Equated Monthly Installment (EMI). The return for periodic payments.balance is paid through post-dated chequesacross the tenure of the loan.Advance Equated Monthly Installment Scheme:This scheme offers 100% financing. The borrowerAutomobile finance growth factorsResearch says that 75% of vehicles purchased in • Availability of credit data, enabling banks tothe last decade were financed through loans. offer higher ‘loan to value’ and balloonHere are the key drivers of this growth: installment schemes at affordable EMIs. Also, availability of loan management software• Liberalization of the economy to allow enabling banks to launch market and track entry of private sector banks and other products easily. financial institutions• Economic growth, especially in the IT sector, • Spread of automobile finance to hitherto leading to higher disposable income. Young underserved locations, as automobile professionals buying their first vehicle barely manufacturers and distributors set up shop a year or two into their jobs across the country• Securitization of automobile loans in the • Emergence of direct selling, collection and aftermath of the 2008 financial crisis recovery agents, supporting banks throughout Thought Paper 03
  4. 4. the lending life cycle, from origination to • Fund and non-fund bank advances to processing to recovery. This also increased automobile companies, spurring expansion competition and forced banks to enter untapped rural markets with motorcycle loans at discounted rates of interest 32% AUTO FINANCE GROWTH 24.3% 21.5% (CARS) 11.3% 5-YEAR TREND -1.2% New car units sold (Nos.) 1,363,000 1,517,400 1,499,300 1,863,700 2,459,500 FY07 FY08 FY09 FY10 FY11 Car Industry sales volume (` cr) 51,113 56,902 56,975 72,683 98,380 Growth 21% 11.3% 0.1% 27.6% 35.4% Cash sales (` cr) 12,778 15,933 19,941 21,805 27,546 Cash sales 25% 28% 35% 30% 28% Finance penetration (` cr) 38,334 40,969 37,034 50,878 70,834 Finance penetration 75% 72% 65% 70% 72% Customer margin (` cr) 5,750 6,145 6,296 7,632 10,625 Customer margin 15% 15% 17% 15% 15% Auto finance market (` cr) 32,585 34,824 30,738 43,247 60,209 Auto finance growth 21% 6.9% -11.7% 40.7% 39.2% Source Kotak Mahindra Prima Conclusion The automobile finance offered by banks and has tripled the disbursal of automobile loans in financial institutions at affordable rates of the last few years. interest has paved the way for the growth of As Indian society abandons its erstwhile savings the automobile sector in India. Various schemes culture for a consumerist, indebted lifestyle, and features are available to consumers which there is concern about its ability to fund its can accommodate their every need, thus retirement years in the absence of a Government luring them into a financing option. The Indian sponsored social security program. This is automobile sector has come a long way since already being manifest as a higher retirement the first car was manufactured in Mumbai in age, extending well into the 60s. The Government 1898. Today, it is one of India’s key industries has a big task on hand to introduce proactive and a pillar of the economy, employing over 10 measures to combat potential economic million people directly and indirectly. imbalances arising from these trends. The Indian automobile market has claimed global Against this backdrop, it is natural to ask attention, being the second largest two wheeler whether it is worth the while of a middle class market, fourth largest commercial vehicle market, household to spend half its income repaying and eleventh largest passenger car market in the loan on a luxury car. However, as long as the world, and poised to become the third banks continue to offer attractively priced loans, largest automobile market next only to the consumers will succumb to temptation. United States and China. Industry growth fueled by the middle class’s appetite for luxury cars04 Thought Paper
  5. 5. References1. Maps of 5. thehistoryof.netmotorbeam.com2. 6. Surf India.Com3. 7. Business.mapsofindia.com4. Reghunathan Sukumara Pillai Industry Principal, Finacle, Infosys Jayanthi K J Principal Consultant, Finacle, Infosys Thought Paper 05
  6. 6. About FinacleFinacle from Infosys partners with banks to transform process, productand customer experience, arming them with ‘accelerated innovation’that is key to building tomorrow’s bank.For more information, contact© 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosysacknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.