Auto financing to grow in india

Auto financing to grow in india

The auto industry (passenger cars and multi-utility vehicles) has been a leading indicator of the growth of Indian economy. It has been growing at a rate of 16% for the past five years, roughly twice the rate of our GDP (gross domestic product) growth. We expect the industry to double in five years on the back of growing aspirations of the current set of manufacturers as well as the continued inflow of global players.

Stable growth

Auto finance drivers

Buoyant economy leading to higher disposable income.

New models and launches in untapped segments. Reduced ownership period to 36-40 months.

Extended product life cycles and competition amongst manufacturers have kept a check on car prices. In some instances, prices are unchanged from a decade ago.

Geographical expansion and better distribution by both manufacturers and financiers has opened up new markets.

Credit bureaus have been of tremendous help in taking informed credit decisions and lowering credit losses. For a thin margin business like auto finance, this has been a great help.

With better availability of credit data, financiers have been offering higher-loan-to-value, and balloon instalment schemes enable customers to keep monthly EMIs at affordable levels.

The changing customer mindset towards leveraging has meant that more customers are willing to take loans early in their working lives. This segment typically looks at their cash flows and the EMIs while deciding what car to buy.

Post the financial crisis of 2008, lenders with large unsecured lending books suffered large losses. Car lending, being secured, saw relatively lesser losses, thus lenders this time around are focusing on funding such assets.

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Ahmed Raza Khan/Mint

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The past 12 months have also seen the entry of captives in the Indian market. BMW Financial Services, Volkswagen Financial Services, Daimler Financial Services and Toyota Financial Services have commenced operations in the country. The advent of captives signifies the importance that manufactures are according to the Indian market.

Usually, with the arrival of captives, the financing industry also expands as they launch new financing products. Residual value guaranteed products enable a customer to pay a fixed monthly rental for the lease period and then either buy the car at a pre-determined residual value or trade it in for a new car.

Banking on BRIC

Car sales in developed markets like Europe and the US are likely to remain stable or slow down. Consensus estimates suggest that global sales growth will be driven by emerging economies like Brazil, Russia, India and China.

This is the assumption behind the aggressive growth plans by existing manufacturers and substantial investment by the new entrants.

In India, as overall auto sales double in next five years, India’s auto finance industry is set to ride a growth trajectory that is unparalleled in the domestic or international market.

Sumit Bali is director of Kotak Mahindra Prime Ltd.