AUTO FINANCE IN INDIA

BY:HIMANSHU NAYAK

JAY PRAKASH SHARMANEHA TANEJA

ROHAN SEHGALSAKSHI GUPTA

SHANTANU TALAVLIKAR

Evolution of Automobile Industry

Initial Years Manufacturing was licensed

•High Customs duty on import

•Steep excise duties & •sales tax

•2 Major players: Premier Automobiles Ltd & Hindustan Motors

1980s

•Entry of MUL, better product, with government support

•Seller’s Market

•Long Waiting Periods

Early to mid 90s

•Seller’s market and long waiting periods

•Delicensing in 1993

•Removal of capacity restrictions

•Decrease in customs & excise

•Auto finance boom- more players (foreign banks & non banking companies, better schemes.

Mid 90s – Early 2000s

•Buyers market

•Increase in Indigenization

•Easy Auto finance

•Manufactures diversifying into related activities: finance lease, fleet management, insurance and used car market

AUTOMOBILE

2 WHEELER 3 WHEELERPASSENGER

VEHICLECOMMERCIAL

VEHICLE

MOTORCYCLE SCOOTERS SCOOTERETTES MOPEDS

I.C.V. M.C.V. H.C.V.

Trends in the automobile sector…

Production of automobiles

4.8 5.36.3

7.28.5

0

2

4

6

8

10

2000-01 2001-02 2002-03 2003-04 2004-05

mil

lio

n n

um

ber

s

Domestic Sales of automobiles

4.6 5.25.9

6.87.9

0

2

4

6

8

10

2000-01 2001-02 2002-03 2003-04 2004-05

mil

lio

n n

um

ber

s

Exports of automobiles

0.17 0.18

0.31

0.48

0.63

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2000-01 2001-02 2002-03 2003-04 2004-05

mil

lio

n n

um

ber

s

CAGR 15.4% CAGR 14.2%

CAGR 39%

•Domestic Sales have been growing strongly• Exports have nearly tripled in the last 5 years•Largest three wheeler market in the world•4th largest passenger vehicle in Asia•4th largest tractor in the market•5th largest commercial vehicle market in the world

INDIAN BANKS ARE ON A HIGH GROWTH TRACK

1.Overall banking sector is growing by – 18%2.Retail Sector (CAGR – 5 years)• Housing Loan : 50%• Consumer Durables : 16%• Credit Card : 45%• Two Wheeler Loan : 31%• Car Loans : 26%• Other Personal Loans : 38%More than 25% of the Bank Loan Assets are in

Retail sector ensuring high returns - likely to cross Rs.5700 bn by 2010

Segment wise market share…

Growth Rates of different segments

23.5

11.314.3 14 14.2

0

5

10

15

20

25

CommercialVehicles

PassengerVehicles

Twowheelers

Threewheelers

totalAutomobiles

Segments

4 ye

ar C

AG

R

Two Wheeler

Three Wheeler

Passenger vehicles

CVs

•The industry has not experienced much change in its structure over the last 6 years

•Two- wheelers form the major share of domestic sales

•Passenger vehicles lead the exports market(57.4%)

•2 wheelers form the bulk of exports as well, but are losing share to Passenger vehicles

•The growth in the two wheeler market is driven by the motorcycle market and is expected to grow at 14-15 % YOY

78.63%

13.44%

4.03%3.9%

The Key Players…

Commercial vehicles

TATA Motors, Ashok Leyland, Swaraj Mazda,Mahindra & Mahindra ,Force motors, Eicher Motors

Passenger vehicle

TATA Motors, Maruti Udyog, Honda Motors, Toyata, Skoda, Mahindra & Mahindra, Daimler Chrysler, Hindustan Motors

Two Wheeler Hero Honda, Bajaj Auto, Honda Motors, TVS Motors, Yamaha , Kinetic Motors

Three Wheeler Bajaj Auto, Piaggio India

Two wheeler Passenger vehicle

• Favorable Demographics • Improving income curve • Reducing interest rates

•Cost Pressure •High Expectations •Inadequate Infrastructure Development

KEY CHALLENGESKEY ENABLERS

Key Focus Areas• Product development( includes collaboration, new products

developed)• Vendor base (quality of vendors, skill levels , size etc.)• Manufacturing capability( quality levels, productivity & skill levels,

technology )• Service levels• Supply chain• Labor law• Leverage IT

Key Features of Future Auto Policy• Foreign Direct Investment • Import tariff • Incentives for Research and Development (R&D) • Environmental Aspects • Other measures

Negative Impact on Auto Financing

• The Reserve Bank of India (RBI) raised its reverse repo rate to

7.75 per cent. This rise is expected to result in an increase in loan rates for both the retail and corporate sectors.

• A rise in the reverse repo rate raises the cost of borrowing funds of the banks, leading to a rise in lending as well deposit rates to negate the effect. For protecting its net margin, a bank typically counters a rise in the reverse repo rate by increasing its lending rates on housing loans, car loans, personal loans, and other retail loans. Ultimately, the weight of a higher interest rate regime is borne by the consumer.

• Every time the RBI has made an upward revision in its reverse repo rate, the country’s leading scheduled banks providing car loans have countered with an increase in their lending rates. Interest rates on car loans have witnessed a surge of at least 3.0 percent points since December 2005.

Reasons For High Demand Of Motor Vehicles

• However, motor vehicle sales in India have remained buoyant despite the rate hikes. The chief reasons attributed to this trend are the sales incentives and discounts offered by the vehicle manufacturers, which are operating in a highly competitive market. Although, the Indian motor vehicles market is far from being a zero-sum market, vehicle manufacturers are forced to resort to such marketing strategies to lure the price-sensitive Indian buyer.

• Indian consumers rely heavily on institutional financing for purchasing new vehicles. Financing institutions on an average contribute close to 90.0 percent of the invoice value of the purchased motor vehicle and this has been one of the chief reasons for a pent-up demand for motor vehicles over the last two years.

• Inflation has remained largely in the range of 5.0 percent to 5.5 percent over the past 15 months.

• Against this backdrop, the probability of motor vehicle sales in India to dampen is expected to rise:

– If the vehicle manufacturers decide to withdraw the sales incentive schemes currently in operation, and

– A higher cost of availing auto finance due to revisions in the interest rates in the future.

Types of car finance• Margin Money

Scheme

– Pay margin money of atleast 10% of the total loan amount with 1 EMI, balance through post-dated cheques.

– Repayment term of 1 to 5 years.

– Basic advantage: Lowest EMI

• Advance Equated Monthly Installment Scheme– Offers 100% loan.– Pay about 5 EMI’s in

advance, balance through post-dated cheques.

– Disadvantage: Interest charged on entire loan amount, thus higher EMI.

Numerical example

• Value of vehicle : Rs.5 lakh• Rate of interest : 5%• Repayment tenure : 3 years

Comparison

Margin money Advance Installment

Amount Rs.4 lakh Rs.5 lakh

Down payment (20%)

Rs.1 lakh 0

EMI Rs.12240 Rs.15300

Upfront payment Rs.1 lakh Rs.91800 (6 EMI’s)

EMI’s left 36 30

Result More EMI’s, lower EMI amt.

Less EMI’s, high EMI amt.

Types of car finance (contd..)

• Security Deposit Scheme

– Deposit a sum of 10-30% of total loan amount as security deposit.

– Refundable on completion of loan period.

– Deposit earns a simple or compound interest, tenure 2-5 years.

– EMI higher as compared to other schemes

• Hire Purchase Scheme

– Car let on hire, hirer has option to purchase the car.

– Mostly offered by NBFC’s.

– Option money as low as one rupee charged by NBFC.

Types of car finance (contd..)

• Lease Financing Purchase

– Contract between owner of asset (lessor) and its user (lessee) for hire of asset.

– Ownership rests with lessor.– Lessee has right to use asset for a given period of

time in return for periodical rental payments.– Offered by NBFC’s

– Mostly availed by corporates for tax savings.

How to finance cars

• Through Banks– Easiest source– Longer time for processing paper work– Viable if there is acquaintance with a bank.

• Through NBFCs– Have tie-ups with dealers and manufacturers– Have to be cautious of ‘Dealer discounts’

Comparison of banks (new cars)

Bank Amount Tenure

ICICI Finance upto 95% of car value, min amt Rs.100000

Repayment periods from 1 to 7 years

SBI No ceiling on loan amt for new cars, max 15 lacs for used cars

Max 7 yrs for salaried, 5 yrs for self employed & professionals

Axis Finance upto 85% of car value, min amt Rs.100000

Max period of 5 years

HDFC Finance upto 90% of car value, min amt Rs.50000

Repayment periods from 1 to 7 years

Citibank Finance upto 90% of car value

Repayment periods from 1 to 5 years

Standard Chartered

Finance upto 90% of car value

Repayment periods from 1 to 5 years

ABN AMRO Finance upto 90% of car value, min amt Rs.50000

Repayment periods from 1 to 5 years

Interest & EMI’s

Bank Interest rate

Min EMI for 3 yr loan

Min EMI for 5 yr loan

ICICI 11-13% 3274 2174

HDFC 10.5-12% 3222 2131

SBI 9.75-10.25%

3227 2125

Citibank 11-12.5% 3150 2200

ABN Amro 11-12.5% 3246 2155

Finance CompaniesSundaram Finance • Sundaram Finance Group is one of the largest and a leading player in

the area of car finance. It offers finance to all models of cars through it two arms Sundaram Finance Limited and Lakshmi General Finance Limited.

• With a network of over 120 branches and experienced field force, it helps the customers to choose the vehicles and the loan package that suits their pocket. With minimum documentation customers would drive with their cars in just 48 hour

Kotak Mahindra Primus Ltd

• The company offers a wide range of loan options to suit individual needs. Kotak finances unto 60-90% of the value of the car. In the margin money scheme unto 90% finance is available on certain models

• After down payment of the margin money, the financed money would be repaid either through equated monthly instalments or a differential basis as tailored to minimize the outflow.

Ford Credit Kotak Mahindra Ltd

• Ford India is a wholly owned subsidiary of Ford Motor company and provides quality finance products and services for consumers purchasing new and used cars. It offers financial solutions to individuals and corporate customers for Ford labelled vehicles and Ford authorised dealers.

• Its products include retail lease, hire purchase and loans, buy back plans to Corporate for New & Used Cars, Spares & Accessories and Equipment.

Citicorp Maruti, Countrywide Maruti and SBI-Maruti Car Loans

• Maruti Finance allows you to buy the car you want on your terms. Maruti has formed a consortium comprising of eight leading players in the market to serve better.

• It also extends finance for insurance and accessories are built into the EMI to keep the process simple. Also Maruti gives the privilege of extended warranty that may extend to four years.

Birla Global Finance

• Birla Auto Finance offers various financial products to suit the individual needs. The options offered are flexible, easy and fast. Birla Auto Finance creates a financing structure specially for customers, keeping in mind the specific requirements of the customers.

• It offers finance for all type of cars including foreign cars. It also organizes deliveries for all types of cars.

Borrowing Rate

• It is possible to get a loan at 9.5% even if the base rate is 10.5%.

– Financers provide ‘interest rate breaks’ of 0.5-1% per year for customers who have existing relationship with them.

– Firms get financial incentive from car manufacturers (subvention).

– Example: Base rate – 10.5% Interest rate break – 0.5% Subvention – 0.5%

Effective borrowing rate – 9.5%

International scenario ofauto finance

USA

• Seeing problems with Sub-prime rate so equity shortages among consumers..

• Until the Housing loans market doesent pick up Auto loans will neither…Ripple effect

• Auto Loans Market down by as much as 12%

USA Big Players….

• Consumer Portfolio Services• Bank of America • Citibank • Wells Fargo • Wachovia• U.S. Bank • Nelnet (formerly ASAP/Union) • Bankrate.com (Internet based Banks)• Credit Union National Association's

Interest rates- Bank Of America

HSBC Bank Interest Rates

Average interest Rates in US

Europe…• With nearly 1.2 million new cars registered in 2003, the Eastern European

automotive market is developing rapidly.

• The 'big five' markets - Poland, the Czech Republic, Hungary, Slovakia and Slovenia account for nearly 800,000 units in the combined annual car.

• The overall penetration of finance in total retail sales to cross 40 percent by 2011. While many manufacturers and banks are evaluating their opportunities in Eastern Europe, the recent accession to the European Union (EU) has brought in a multitude of changes in its legislative and economic landscape

• Financing Background Traditionally been dominated by independent and bank owned finance

companies that have established strong dealer and customer relationships. Finance leasing was traditionally the popular financing tool in the Czech Republic, the Slovak Republic and Baltic countries; Hire purchasing was dominant in Poland and Hungary.

• Tax Legislation influences borrowing The next most significant issue is the legislation on Value Added Tax (VAT)

which is affecting the financing business customers fear increases in the overall cost of financing.

Europe’s Big Players….

• ABN Amro Bank N.V. (AA-/Stable)ABN Amro Bank N.V. (AA-/Stable)

• Barclays Bank (AA/Stable)Barclays Bank (AA/Stable)

• BNP Paribas (AA/Stable) BNP Paribas (AA/Stable)

• Credit Suisse Group; Credit Suisse (A+/Stable; AA-/Stable)Credit Suisse Group; Credit Suisse (A+/Stable; AA-/Stable)

• Deutsche Bank (AA-/Stable)Deutsche Bank (AA-/Stable)

• HSBC Holdings PLC; HSBC Bank PLC (AA-/Stable; AA/Stable)HSBC Holdings PLC; HSBC Bank PLC (AA-/Stable; AA/Stable)

• ING Bank N.V. (AA/Stable)ING Bank N.V. (AA/Stable)

• Royal Bank of Scotland Group PLC (The); National Westminster Royal Bank of Scotland Group PLC (The); National Westminster Bank PLC; Royal Bank of Scotland PLC (The) (AA-/Stable; AA/Stable; Bank PLC; Royal Bank of Scotland PLC (The) (AA-/Stable; AA/Stable; AA/Stable)AA/Stable)

• Societe Generale (AA-/Positive)Societe Generale (AA-/Positive)

• UBS AG (AA+/Stable)UBS AG (AA+/Stable)

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