The Hindu Business Line : Higher spreads, larger pool to drive used car loans segment

Mumbai, March 13 Finance for second hand cars has grown by almost 25 per cent on a year-on-year basis and bankers expect it to double in the next three-to-four years. According to a recent report by Crisil, the estimated used car finance grew by 38 per cent at Rs 11,200 crore in 2006-07 from Rs 8,100 crore in 2005-06.

New car sales in 2007-08 are at about 1.55 million, while that of used cars are at 1.50 million during the same period. “85-90 per cent of the entire used car market is unorganised and is more of the nature of customer-to-customer transaction, handled by brokers. The organised market accounts for just 8-10 per cent,” said Mr N.R. Narayanan, Group Business Head-Vehicle Finance, ICICI Bank.

BETTER MARGINs

Mr Manoj Mohta, Head-Research, Crisil, said banks have an incentive to encourage loans for used cars as they offer better margins. “The interest rates on such cars are usually higher (about 18 per cent) than that on new cars (12-14 per cent) and, hence, if banks can manage the risk efficiently then they will have a higher spread on earnings and it will be an incentive for banks,” said Mr Mohta.

“Though such loans fetch banks higher rates of interest, banks have to be more cautious while lending to this segment as it is a high-risk segment,”said Mr V.S. Ashok Khanna, Executive Vice-President and Business Head, Car and Two Wheeler Loans, HDFC Bank.

More cars

Availability of more number of used cars is also a reason for the growth.

“There is a bigger car pool of used cars, with more car models being launched. People who buy new cars do not usually own it for long and tend to sell it off in two-three years, thereby creating a large used car pool,” said Mr Narayanan.

People are changing their vehicles more frequently because of higher disposable income, attractive offers from dealers on various models and the availability of longer tenure loans with attractive EMI schemes, said Mr Narayanan.

Agencies such as Maruti True Value and First Choice, which deal with used cars, have also added credibility to the second hand car industry, said bankers.

“There is a greater demand for such cars in the western and southern regions while people in the North still prefer to buy new vehicles as they have greater wealth at their disposal,” said Mr Ramesh G. Iyer, Managing Director, Mahindra Finance.

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