The Hindu Business Line : A bumpy, hard ride for vehicle finance segment

The vehicle finance industry, which includes financing of both passenger vehicles and commercial vehicles, witnessed a roller-coaster ride during 2008-09. While the auto finance industry was on a growth trajectory during the beginning of the year, it saw a gradual decline and even negative growth in some sectors beginning the middle of the year, said senior bank officials and industry experts.

The slowdown in finance has been attributed to the overall slowdown in the economy, the tight liquidity conditions and high interest rates. Mr Manoj Mohta, Head-Research, Crisil Research, said, “The overall vehicle demand has seen a significant slowdown due to the slowing economy, concerns regarding growth in income, rising interest rates and reduction in finance penetration on account of tightening underwriting norms. The economic slowdown has impacted CV demand whereas reduced confidence on income growth coupled with increased cost of finance has affected demand for cars and utility vehicles.”

Financiers’ intent to consolidate their existing portfolio by adopting stringent underwriting norms has impacted customers’ ability to get a loan, and hence, the vehicle finance industry is estimated to register a negative growth of around 15 per cent in 2008-09, against a compounded annual growth rate (CAGR) of 18 per cent recorded between 2002-03 and 2007-08, Mr Mohta pointed out.

“We began the year on a positive note. The first quarter was quite good but, thereafter, we saw gradual decline in both the passenger cars and CV segments. Untill November of this financial year, car sales were more or less flat, while CV sales were down about 10 per cent (heavy commercial vehicles down 17 per cent),” said Mr N.R. Narayanan, Group Business Head-Vehicle Finance, ICICI Bank.

Mr Narayanan attributed the drop in vehicle loans to various factors, which includes drop in primary sales of vehicles leading to drop in financing requirement, the increase in percentage of customers opting for outright purchase of vehicles rather than opting for financing options, overall demand being lower and tightening in credit parameters by financiers due to the current market situation. “If we make an approximation then we can say that in the case of heavy CVs there has been a 20 per cent fall in financing, while for light CVs it is 10 per cent,” he said.

Economic slowdown

According to Mr V.S. Ashok Khanna, Executive Vice-President and Business Head, Car and Two-Wheeler Loans, HDFC Bank, the demand slowdown in the passenger vehicle segment is mainly driven by the slowdown in the economy.

“The general sentiment is bad; companies are issuing pink slips to their employees. Under such situation people try to save their money rather than add more liabilities,” he said.

The stringent recovery norms has created apprehensions among bankers and has made them wary of lending, thereby further slowing down credit offtake in the sector, Mr Khanna pointed out. “There has been a slight rise in delinquencies but that is not a cause for concern. What is more worrying is that the recent recovery norms and the approach of certain State Governments regarding the repossession of vehicles, which are going against the financiers. This will lead to further slowdown in the industry,” he observed.

Mr Anindya Dhar, National Sales Head-Car Finance, Magma Shrachi Finance Ltd, said, “The year has been a roller-coaster ride for the vehicle finance industry. The slowdown is more to do with sentiments. November and December have not been very encouraging. People seem to be worried about taking financial commitments because of the present market conditions. A lot of financiers have also exited the market or certain segments,” he said.

Magma, Mr Dhar said, has recorded a 40 per cent growth in car finance on a year-on-year basis. “We have financed close to 50,000 vehicles so far this year, up from about 30,000 last year. We are, however, planning to revise our targets downwards for the next year. We were looking at a 100 per cent growth in the car finance segment but now we are hopeful of achieving only about 60 per cent,” he said.

Customer profile-based lending

With rising defaults, customer profile-based lending has assumed far greater importance as against asset-based lending. According to Mr Mohta, customer profile-based lending is largely influenced by income levels and the borrower’s current obligation but it also takes into account the occupational/ business profile of the borrower.

“Financiers have reduced their exposure to applicants from the IT/ITeS industry, where the delinquency levels have been high and recovery difficult due to the floating nature of the population,” he said.

The year saw a lot of consolidation in the industry, with major players exiting certain geographies having high delinquencies such as Uttar Pradesh, Bihar and certain North-eastern States. Financiers have also exited select asset classes such as the two-wheeler segment.

A number of public sector banks, therefore, tried to increase their vehicle finance portfolio during the year to fill the vacuum created by the exit of a couple of private financiers. “Some private banks have decided to reduce their exposure to vehicle finance and we are trying to capitalise on this. However, we will adopt a ‘cautious but aggressive’ approach to ensure that we do not burn our fingers,” said Mr T.M. Bhasin, Executive Director, United Bank of India.

United Bank increased its car loan portfolio from Rs 70 crore in March 2008 to Rs 96 crore in November 2008 and plans to further scale it up to Rs 149 crore by March 2009, Mr Bhasin said.

“We are focusing on customers who have a salary-linked account with our bank. This will ensure that the loan extended is secure,” he said.

Allahabad Bank plans to achieve 20 per cent growth in its vehicle finance segment, said a senior official at the bank. “There is a greater thrust on vehicle finance and we are looking at tying up with manufacturers,” he said. The bank’s total vehicle finance portfolio stands at Rs 300 crore as on September 2008, he added.

Moving ahead

The Reserve Bank of India has taken measures (post-September 2008) to improve the liquidity situation and reduce interest cost through the reduction of repo, reverse repo and cash reserve ratio. But considering the expected rise in delinquencies, financiers might only partially pass on the benefit of the decline in borrowing cost to customers to protect their margins, according to industry experts.

“In the long run, the growth would be driven by the demand arising from changing demographic and income patterns, improved portfolio health on account of stringent credit norms and reduction in delinquency level. This would allow financiers to pass on a significant portion of the interest rate cut to customers to boost demand,” Mr Mohta observed.

There might be a further fall in financing for the next 4-5 months, however post that there might be a pick up in demand, said Mr Narayanan. “There might be a stretch for the next 4-5 months but after that the vehicle finance industry will grow at a CAGR of 10-12 per cent for the next five years, as the depth in the industry is high considering the penetration of cars per thousand people in the country, and the fact that we are an economy which is on the growth path,” he said.

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