Sep. 21 - Oct. 4, 1998
Banking & Finance

Auto Finance
Small car, big boom

Declining spreads have rendered the business unviable for small companies as big boys take over

On the eve of the launch of small cars by bigwigs like Telco, Daewoo and Hyundai, the auto finance business in India is bustling with activity. Alliances of financiers with car manufacturers and strategic tie-ups among financiers themselves have changed the profile of the auto finance business in India, in the last few months.

Dominated by non-banking finance companies (NBFCs) till recently, the business has undergone a significant change, with a handful of big players taking over from a large number of small ones, during the last one year or so, thanks to Reserve Bank of India(RBI)'s measures to regulate NBFCs. When RBI directed NFBCs to curtail deposits to the new prescribed levels, smaller NBFCs were forced to get out of the business.

As a result, the number of NBFCs in the auto finance business has shrunk drastically. 'Last year, there were 400 NBFCs and a couple of foreign banks. Today, there are 2-3 NBFCs and four foreign banks,' says Deepak Gupta, chief executive officer, Kotak Mahindra Primus, a joint venture between Kotak Mahindra Finance and Ford Credit International.

The sluggish economy, with stagnation in demand, too, has affected the existing players. With as much as 50% of car sales estimated to take place every year through financing schemes, the sluggish demand for automobiles has affected financiers also.

Moreover, according to financiers, with the general economic slowdown, loan recovery is a growing problem for them. 'Cheque-bouncing is about 15%, which results in outstandings of 6-7% every month,' says Gupta. Adds N R Divate, wholetime director, Mafatlal Finance, 'Financing of both commercial vehicles and cars is getting tougher. Today, demand, and also the spreads, are low.' From a high of 8%, the spreads are estimated to have come down to about 6%, and for a few NBFCs, it is said to have reached a low of 1%.

With business getting tougher, NBFCs, which earlier were quite aggressive in sanctioning car loans, have now become far more cautious in lending. One of the leading players in auto finance, Lloyds Finance has, in fact, stopped disbursing fresh loans. It has, instead, entered into an arrangement with Countrywide Finance, wherein it will help the latter in identifying business. As per the arrangement, the loan will be in Countrywide's books.

                                How they compare
                   Financing schemes of leading players
                  Kotak Mahindra Primus     Bank of America
Interest          16-17.5%                  19%
Maximum finance   100%                      90% of ex-showroom price
Loan tenure       3 years                   1 to 5 years
Car models        All car models except     All passenger cars. 
financed          Ford. Also finances       No financing of 
                  second-hand cars          second-hand cars
Size of total     Hire-purchase disbursals  About 2,200 car loans 
car-finance       of about Rs 520 cr in     worth Rs 55 cr are 
business          9803. Target for          disbursed every month.
                  9903 : Rs 500 cr 

But where NBFCs have lost out, the big players, especially a few foreign banks, have taken over. Today, foreign banks like Citibank and Bank of America are major players in the car finance market.

In fact, unlike NBFCs, banks have been able to maintain better spreads, thanks to their aggressive deposit mobilisation strategy. 'With spreads declining and costs of finance increasing, the way out is to reduce the cost of funds. This can be done by two ways. One, by raising higher deposits at lowers costs, and second, by pruning operating costs,' says Ajay Mathur, regional sales manager, Bank of America. The bank has a central loan processing unit which, according to him, reduces operating costs.

With a substantial reduction in the number of players, many feel that phase I of the shake-out is over. But among the existing big players, the competition now is more severe, and rate of interest has become the key factor.

Car finance in India is largely through hire purchase schemes. The customer has to give a security deposit or pay margin money or advance instalments. Banks, on the other hand, offer term loans for car finance, and the customer has to pay margin money. With cost of finance becoming a critical factor, a customer prefers the financier who offers the lowest interest rates. With competition hotting up among financiers, interest rates on car loans have already come down to a low of 16%, from a high of 26% a year ago.

With tougher competition, a polarisation is expected in the second phase, with each player having a niche market. This may come about in various ways - financiers tying up with car manufacturers, financiers concentrating on a particular region and financiers catering to a particular segment of the market, say, small cars. Already, while Kotak has a hold on the retail segment of the market, Mafatlal, according to Divate, has strong links in the corporate car finance segment. As far as manufacturers' alliances are concerned, Hyundai has a tie-up with Bank of America, while both Countrywide and Citibank have an alliance with Maruti Udyog.

                       Sluggish demand
                       No. of cars sold
                Apr.-Jul.'96  Apr.-Jul.'97   Apr.-Jul.'98
Daewoo Motors     6,580          3,520          3,404
General Motors      323          3,466          1,323
Hind. Motors      8,008          7,196          6,171
Honda Siel            -              -          3,377
Ind Auto              -              -          2,376
Mahindra Ford         -          3,137          1,298
Maruti Udyog   1,02,597       1,07,876       1,10,403
Mercedes Benz       890          1,285            436
PAL-Peugeot       2,988          2,565            360
Premier Auto      2,683          5,681          1,413
Telco             2,485          1,118            938
Total          1,26,554       1,35,844       1,31,499

The launch of a slew of new models in the small car segment by a few leading players in the automobile industry in the near future has excited financiers. 'New models mean that there is an opportunity for the market to grow. It is a very good thing happening for the business,' says Divate. Adds Gupta, 'In the long run, the market would expand.' Mafatlal Finance, for one, has identified the 800-1000 cc small car segment as its thrust market for the future. Among the new cars expected to hit the Indian roads in the small car segment in the coming months are Matiz from Daewoo, Santro from Hyundai and a car code-named Mint from Telco.

As new small car models hit the roads, a big market for second-hand cars is also expected to emerge, according to financiers. 'I visualise a well- developed second-hand car market,' says Divate. So much so that this segment could be a niche market for some. The increase in the supply of second-hand cars, meanwhile, is expected to reduce their prices further.

Nonetheless, car financiers are optimistic about the future and expect the car finance market, estimated at Rs 3000 cr, to expand in the coming years. Kotak Mahindra Primus has targeted hire-purchase disbursements of Rs 500 cr for 9903. Having tied up with a leading foreign bank, Mafatlal Finance hopes to disburse about Rs 60 cr in loans in 9903. 'I expect a reasonable consumer boom post-1999-2000,' says Mathur. 'Today, the major buyers are small businessmen and traders. The market will expand once new user segments, like the salaried class, come into the picture,' says Gupta.

And, unlike in the past, not too many players will be fighting for a slice of the auto finance cake, during the next boom.