The car loan business of banks is in top gear, thanks to an increase in volume of car sales and a rising preference for financed cars. These, with an increase in cost of vehicles, are helping banks see annual 18-20 per cent rise in the car loan business, double compared to the growth in car sales.
HDFC Bank, the country’s biggest car loan provider, doubled its business in this segment to Rs 620 billion between FY13 and FY17. That’s compounded annual growth (CAGR) of about 23 per cent. ICICI Bank more than doubled the amount to Rs 250 billion in the same period, the CAGR being 18 per cent.
State Bank of India and Kotak Mahindra Bank have also seen double-digit CAGR. The car loan business of the banking sector is estimated to have grown at 20 per cent in both FY16 and FY17, according to a recent report by Kotak Institutional Equities Research. The report estimated the total car loan exposure of eight leading financial institutions at Rs 2.08 trillion as of March 2017.
Ravi Narayanan, senior general manager and head (retail secured assets) at ICICI Bank, said the share was rising of car buyers opting for loans. It is estimated to have moved up to 75-80 per cent, from 65-70 per cent about four years ago.
“The invoice value of cars is also on the rise. Car sales continue to expand at seven-eight per cent (yearly). This is helping growth of the loan business,” said Narayanan.
Some momentum has also come from used car financing. India is now the world’s fifth biggest market for passenger vehicles (cars, vans and utility vehicles), with annual domestic sale of about 3.2 million units. Growing preference for more sophisticated and bigger cars, and sports utility vehicles, has meant an increase in the average price of vehicles. Narayanan said the annual car loan market was Rs 1.24 trillion, if 2.6 million cars are financed every year at an average of Rs 0.6 million each (going by an 80 per cent loan to value ratio).
Car loan financing is a strong business division at banks. There are also multiple players in the market, trying to woo buyers with more attractive interest rates, waiver of processing fee and 100 per cent financing (on ex-showroom price).
However, Narayanan said, the market was large and every entity was able to find a niche. ICICI aims to expand its presence by expanding distribution, introducing new products and strengthening its relationship with car makers.
A Maruti Suzuki dealer from Uttar Pradesh said 85 per cent of vehicles sold by his showroom were getting financed. “Banks have turned quite liberal in financing. Buyers in rural areas with no income proof were earlier given a loan of up to 45-50 per cent on the ex-showroom value; it has gone up to 65-70 per cent,” he said.
In the case of many banks, the branches in tier-II cities are being given a target to get Rs 200-250 million business from car loans every year.
Citing the Maruti example, the Kotak report said financing of new cars had been rising steadily, to 80 per cent currently as compared to 68 per cent in 2011-12. “Car financiers have started offering long-duration repayment options and our channel checks suggest this has probably increased by 12 months to 3.5-4 years over the past few years, resulting in slower repayments and, hence, supporting loan growth.”
India is expected to be the world’s third biggest car market by 2020, with over four million units sold annually. “Car sales are likely to grow at eight-nine per cent (yearly) but car loans will grow at a faster pace,” Narayanan said.