06 Nov 2015

Pratik Munjal

The curious case of the Indian Auto – Finance Industry

No, this is not a Brad Pitt starrer Hollywood flick, but surprisingly, the story of the Auto-finance industry has been quite similar to “The Curious Case of Benjamin Button”! Here’s why:

In the late 1990s and early 2000s, the industry looked to be at its peak. The likes of KV Kamath and other eminent bankers opting for aggressive growth plus the increasing entry of MNCs driving consumer purchasing power combined with the ever increasing dealer tie-ups – were perhaps the driving forces behind the increased disburses of auto loans.
However, the recessionary phase from 2008-2010 caused a major blip. Increased consolidations and voluntary market exit of prominent financiers (which continues to this day!) somewhat slowed down the growth and consumer purchasing power.
Slowly, but surely – with the emergence of dedicated banking software firms like Rupeepower, the industry has once again emerged as a prime candidate for the apex position, amongst the list of growing industries.

Why the recent growth is not merely a rosy picture The double digit year on year growth is here to stay! – I predict it not because I am heading an auto-finance project at Rupeepower.com but because I have observed the trends from close quarters in the UK, Indian and Australian auto finance industry.

An average of 88% consumers want to purchase a new vehicle if and only if there is financing available. The percentage is almost similar for the category of consumers opting for a used vehicle purchase (secondary purchase). Of these 60% would like to purchase and finance online.

You don’t need an eagle’s eye to see that the future of consumer banking is “digital”and with credit bureaus such as CIBIL, Equifax, Experian & FICO striving to cover most of the Indian consumer segment, online credit decisioning is replacing the conventional sales agent based loan application process. Moreover, since increasing the GMV is a major strategic goal of the e-commerce giants today, the Automobile category perfectly fits the bill. The online sale of automobiles and loan approvals can be termed as a “Match made in heaven”.

It is that simple!

If you have not been a loan/credit card defaulter in the past and qualify a minimum income, age and stability criteria used by the lender, you most certainly will be successful in securing an auto-loan (provided you don’t apply for a BMW with a INR 20,000 per month salary). Particularly in the case of car purchase, since the bank has a collateral/security in the form of your vehicle, its own risk while disbursing the loan is reduced to a great extent. In simple terms, the bank retains the legal ownership of the vehicle till the time you pay the installments in full– typically over a 4-5 year period.

The curious case of the Indian Auto – Finance Industry
A word (rather a phrase) of caution is apt here, “Don’t have too much on your plate!”.
I have seen my colleagues fresh out of college, secure auto-loans for lavish sedans and cushy hatchbacks only to end up defaulting on the loan amounts within few months of the repayment period. A sensible thing to do is to conduct a detailed income and expenditure analysis and then consider the amount for an auto-loan which is left after your savings for the month have been adjusted. An affordable and timely payment of the EMI will keep the pesky debt collectors at bay! It is for this exact reason, we provide customers with EMI calculators on RupeePower which gives you the complete breakup of your loan costs and repayment schedule to plan your finances better.

If I were a bank today

As I mentioned, consolidations and market exit of some of the banks continues till date: ICICI Bank and Axis Bank have already burnt their fingers on the two wheeler loan product and have exited the segment. If you were to plumb into the innermost details, the increasing cost of customer acquisition and dealer monoply have led to lower margins and hence the market exits.

Can the lenders then get rid of both the problems? The answer is Yes. In the short-term solving the first problem is more realistic. Again Digital banking can be an effective lifeline. It would solve two problems: first, it would help the lender cut-down the costs involved in high salaries and commissions paid to the Direct Sales Agents and second it would improve customer experience by bringing down the turn around time by an average of 25%. The final delivery of the vehicle can still be done by the dealer with lenders paying reduced margins to them. In the long-term the online vehicle aggregators and e-commerce firms will need to master the last mile logistics to deliver the opted vehicle and loan paperwork at the customer doorstep. This would involve stronger tie-ups with manufacturers to by- pass the dealers thereby saving the monies on dealer payouts. Yes, this means selling vehicles at attractive discounts – hopefully enough for the customer to override the lure of a test drive in favour of saving a few Indian Rupees.

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