Lenders Bet On Financing Used Vehicles Amid Auto Slowdown

Non-bank lenders are increasingly financing such purchases, drawn by better yields and entry of organised sellers. For most non-bank financial companies that provide such funding, their used vehicle loan book grew more than the overall advances in the quarter ended June, according to exchange filings. And they anticipate a strong growth in the segment.

For every 100 new auto sales, 120 second-hand vehicles were sold in India as of March 2019 compared with 80 in 2012, according to a report by Edelweiss Securities Ltd. That pushed the category’s growth to 11 percent a year against 4 percent for new cars.

Still, the ratio is short of the global average of 130 pre-owned vehicles to 100 new ones. And used-car finance penetration is 17 percent compared with 75 percent for the ones freshly shipped from factory, providing enough room to grow.

The uptick in used vehicle sales comes at a time when the automobile sector is in the middle of its worst slump in over two decades over falling sales, production cuts and showroom closures, reflective of a broader slowdown in the Indian economy. Auto sales have been declining since the Diwali festival last year following increased upfront insurance costs, resulting in dealerships offering discounts to clear high inventory.

The slowdown, falling income growth, household savings and evolving buyer profiles are likely to rev up used car sales at the cost of new car sales, the Edelweiss note said, adding that the emergence of organised players has increased customer trust.

There has been a shift to the organised sector, according to AU Small Finance Bank Ltd., which primarily finances used car and multi-utility vehicle sales. “This business was hitherto a mom-and-pop show,” Bhaskar Karkera, head of the lender’s vehicle financing unit, told BloombergQuint, adding that they have “calibrated their team” from new vehicle financing to funding used vehicle purchases. Auto financing comprises over half of the bank’s retail asset base of Rs 20,000 crore.

While buyers look for better in used vehicles, lenders charge a higher interest rate on financing pre-owned automobiles, improving their yields.

Business is booming at two of India’s largest marketers of pre-owned vehicles—Maruti True Value and Mahindra First Choice.

Maruti True Value, Maruti Suzuki India Ltd.’s subsidiary that refurbishes and sells pre-owned cars, said its sales rose 19 percent in FY19 and 8.55 percent so far in 2019-20 compared with 2.17 percent in FY18. “Alto, WagonR and Swift are the most popular models at True Value contributing over 55 percent of total sales,” a company spokesperson said over mail without specifying the number of cars sold.

The used car market is expanding very rapidly and was 1.3 times the size of new car market in FY19, Ashutosh Pandey managing director and chief executive officer of Mahindra First Choice Wheels Ltd., told BloombergQuint in an emailed response. “Last year, we sold nearly 2,50,000 used vehicles through our retail network and the wholesale channel,” he said, adding they have grown nearly five-fold over the past five years. “During the current fiscal, we are confident of growing at 40-50 percent. Our target is to grow 4x during FY19-23.”

All the four business verticals of Mahindra First Choice—retail, enterprise, procurement and digital—registered good growth, according to Pandey. The enterprise vertical—which deals with repossessed vehicles of fleets, among others—grew by over 50 percent so far this year, he said, adding popular brands in the retail segment mirror the demand scenario.

The most popular car models, he said, are Honda City, Swift Dzire, Mahindra Scorpio, WagonR, Hyundai i10 and i20, Mahindra XUV, Ertiga and Toyota Innova.

Sales Grow Across Categories

Financing is growing for all categories of used vehicles—from scooters to heavy trucks, according to BloombergQuint’s conversations with non-bank lenders and management disclosures during investor calls.

Shriram Transport Finance Company Ltd.

Demand for old vehicle financing is “good” led by intermediate and light commercial vehicles, Umesh Reverkar, managing director and chief executive officer of the non-bank lender, told BloombergQuint in an earlier interview.

• Commercial vehicle financing is a highly relationship-based market in which many customers move from used to new vehicles.
• Many customers start with used vehicles and then graduate to new commercial vehicles.
• Assets under management in the used vehicle segment grew by 7 percent in the first quarter ended June.
• It said in the post-earnings call for Q1 that it has reduced exposure to new vehicle lending but used-vehicle lending continues with a lower loan-to- ratio.

Mahindra & Mahindra Financial Services Ltd.

“We finance roughly 10,000 used vehicles in a month across products such as tractors, utility vehicles, cars and small volumes of trucks,” V Ravi, chief finance officer of M&M Finance, told BloombergQuint.

• Used vehicles comprise 12-13 percent of their business—of which utility vehicles and cars form 60-65 percent and tractors 15-20 percent.
• The segment is a focus area for the company—which has tie-ups with both Mahindra First Choice and Maruti True Value—since the last 3-4 years.
• Overall growth in disbursements is in single digits; for used vehicles it’s in double digits.

Magma Fincorp Ltd.

“We grew our used assets disbursement by 47 percent year-on-year and used assets now contribute 30 percent of asset-backed finance AUMs,” the non-bank lender said in an earnings call for the quarter ended June. “This strategy will help us grow our yields and net interest margins, both of which will serve well during elevated environment of cost of funds.”

• Pick-up in demand for used vehicles is in line with earlier cycles where demand for financing increased with slowdown in primary sales of new vehicles.
• Targeting 20-25 percent growth over last year in used vehicles segment’s AUM.

Equitas Small Finance Bank

It said at the post-earnings call that it’s increasing the sales team for used commercial vehicles, which “we expect to increase the contribution of used commercial vehicles for the current year”.

Among banks, vehicle financing contributes a sizeable 28 percent of the total loans for IndusInd Bank Ltd.—commercial vehicles account for 13 percent of the advances. The lender, however, hasn’t seen a dramatic pick-up in the used car segment. In every segment, about 20 percent is contributed by used vehicles and existing customer base, according to SV Parthasarthy, head of consumer finance at the bank. Both new and used vehicles loans have always moved in tandem, he said.