What vehicle loans tell us about cars Indians want

Take the recent preference shown by Indians for costlier vehicles. Utility vehicle sales made up 48.5% of all passenger vehicle sales in 2021-22, up from 27.9% in 2018-19, shows data from HDFC Securities. Even within the compact cars segment, premium compact cars account for one-fifth of all sales, as compared to one-sixth in 2019. It’s true even of two-wheelers, indicating a larger trend, one that has been referred to as “premiumisation” of the passenger vehicle industry.

For the vehicle-financing sector, this has essentially meant a bigger ticket size of loans. Loans smaller than ₹5 lakh contributed 25.2% of total vehicle loans in 2020-21, down from 30.7% in 2018-19. That share has gone to loan sizes of between ₹5 lakh and ₹15 lakh.

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This bodes well for financiers, even if penetration rates increase only marginally. The number of vehicles sold on top of higher ticket sizes should help the industry grow at a compounded annual growth rate of 17% in the next four years, according to HDFC Securities.

Margin play

In contrast, the used-car segment attracts customers looking for a lower cost of acquisition. This means the ticket size of loans tends to be lower too. Besides, the huge disparity in quality in the used-cars segment—even with same models and those manufactured in the same year—has implications for the cost of processing loans and provisioning (to account for a loan turning bad). For lenders, operating expenses for a used car are 1.5 percentage points higher than that for a new car, and provisioning is more than two times.

However, the higher interest rates that lenders charge for a used car more than make up for the additional costs. While profit before tax as a percentage of loan value for new cars is 1.3%, it is 2.9% for used cars. The market for new-car financing is highly competitive, which pushes down interest rates. The old-car lending segment, however, is marked by low penetration rates.

Untapped market

According to an analysis by consulting firm RedSeer, loan penetration rate in the used-car segment in India is 17%, compared to 75% in the new-car segment. The gulf between the two segments is high even in developed markets. However, loan penetration in used cars elsewhere is higher—in the US, for example, it is 37%. India is unlikely to reach those levels, but has scope to grow, driven by traditional factors such as lower cost of ownership, as well as recent changes like the entry of auto tech startups, availability of data, and the business need for lenders to grow. The last two are expanding the customer pool beyond salaried employees, the traditionally favoured segment.

Besides, the ticket size of loans is expected to grow as premium cars sold in the last few years enter the used-car market. The annual disbursement of used-car loans is expected to touch ₹1 trillion by 2025-26, from about ₹0.3 trillion now, according to HDFC Securities.

Electric question

While India is betting big on EVs, there are questions on how fast financing for this segment will pick up. By 2030, the government wants EVs to account for 30% of all vehicle sales, and has rolled out incentives on both the demand side (lower taxes, subsidies) and the supply side (production-linked incentives). A number of automakers have committed investments and announced product launches. Vehicle sales have picked up too.

However, lenders have been reluctant. According to a report by mobility consultancy RMI India, EVs need financing of ₹0.4 trillion by 2025 and ₹3.7 trillion by 2030. However, lenders have not stepped up due to questions over product quality and resale value. Some of it might be addressed as the industry evolves and more EV brands tie up with lenders. Till then, it’s the traditional vehicles that will drive car loans.

www.howindialives.com is a database and search engine for public data.

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