Banks’ auto lending business is booming, growing 18-20% annually

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The car loan business of banks is booming, thanks to an increase in the volume of car sales and a growing preference for financed cars. These, along with an increase in the cost of vehicles, are helping banks see an 18-20% annual increase in car loan activity, double the growth in car sales.

HDFC Bank, the country’s largest auto credit provider, doubled its business in this segment to Rs 620 billion between FY13 and FY17. This represents a compound annual growth (CAGR) of approximately 23%. ICICI Bank more than doubled the amount to Rs 250 billion over the same period, with a CAGR of 18%.

State Bank of India and Kotak Mahindra Bank also registered a double-digit CAGR. According to a recent report by Kotak Institutional Equities Research, the banking industry’s auto loan activity increased by 20% in fiscal 2016 and fiscal 2017. The report estimated total auto loan exposure of eight major financial institutions to 2.08 trillion rupees in March 2017.

Ravi Narayanan, Senior Managing Director and Head (Retail Secured Assets) at ICICI Bank, said the share of car buyers opting for loans was increasing. It is estimated to have risen to 75-80%, from 65-70% about four years ago.

“The invoice value of cars is also on the rise. Car sales continue to grow seven to eight percent (per year). This contributes to the growth of the lending industry,” Narayanan said.

Some impetus also came from used car financing. India is now the world’s fifth largest market for passenger vehicles (cars, vans and commercial vehicles), with annual domestic sales of around 3.2 million units. The growing preference for more sophisticated and larger cars and sport utility vehicles has led to an increase in the average price of vehicles. Narayanan said the annual car loan market is Rs 1.24 trillion, if 2.6 million cars are financed each year at an average of Rs 0.6 million each (with a loan to value ratio of 80 %).

Car loan financing is an important business sector in banks. There are also many players in the market, trying to entice buyers with more attractive interest rates, waiver of processing fees and 100% financing (on the ex-showroom price).

However, Narayanan said, the market was large and each entity was able to find a niche. ICICI aims to expand its presence by expanding distribution, introducing new products and strengthening its relationships with automakers.

A Maruti Suzuki dealer in Uttar Pradesh said 85% of vehicles sold by its showroom were financed. “Banks have become quite liberal in terms of financing. Buyers in rural areas without proof of income previously received a loan of up to 45-50% of the ex-showroom value; it went to 65-70%,” he said.

In the case of many banks, branches in Tier II cities aim to raise between Rs 200 and 250 million annually through car loans.

Citing the example of Maruti, the Kotak report said financing for new cars has grown steadily, to 80% currently from 68% in 2011-12. “Car financiers have started to offer long-term repayment options and our channel checks suggest this has probably increased from 12 months to 3.5-4 years over the past few years, resulting in slower repayments and, therefore, supported loan growth.”

India is expected to be the third largest automotive market in the world by 2020, with over four million units sold each year. “Car sales are expected to grow 8-9% (per year), but car loans will grow at a faster rate,” Narayanan said.

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