Loans for purchasing cars a rising trend in India, finds Jato Dynamics

More and more Indians are purchasing cars on loans now vis à vis the pre-Covid-19 period, with finance penetration for passenger vehicles (PVs) increasing from 72-75 per cent in 2019 to 77-80 per cent in 2023, according to Jato Dynamics's data, which has been reviewed by Business Standard.

“The availability of credit itself, with more banks coming in, the rise in rural sales with more NBFCs (non-banking financial companies) participating, the rise in the share of fleet sales, the drop in interest rates, and banks coming out with tailor-made products for car-buyers — all have contributed to this growth,” Shashank Srivastava, senior executive officer, marketing and sales, Maruti Suzuki India (MSIL), told Business Standard.

Fleet sales, which comprise car sales to companies, organisations, and government entities that own a fleet of cars, have also seen a significant increase. “In 2019, fleet sales were less than 2 per cent of our total sales volume. Right now, their share has increased to 10-12 per cent. About 95 per cent of the cars sold as fleet sales are financed through loans. So, any percentage increase in fleet sales adds disproportionately to the financial penetration,” Srivastava explained.

Among the leading car manufacturers in India, Hyundai and Tata Motors have seen the most significant growth in their finance penetration since 2019. Hyundai's penetration has risen from 65-70 per cent in 2019 to 77-82 per cent in 2023, while Tata Motors’ finance penetration has surged from 64-69 per cent to 71-76 per cent during the same period.

Only MSIL responded to Business Standard’s queries on this matter. 

Ravi Bhatia, president of Jato Dynamics India, attributes the rise of finance penetration for PVs in the country to rising vehicle prices, easier loan availability, growth of the middle class, and improved economic conditions. “The cost of cars has been steadily increasing in India, making it more challenging for buyers to pay upfront. Auto loans provide a way to overcome this hurdle and make car ownership more accessible,” Bhatia said, adding that many middle-class households are now able to afford car loans, which was not the case in the past.

Banks and other lenders have become more willing to offer car loans in recent years, with relatively attractive interest rates and flexible repayment terms, Bhatia said. 

MSIL’s Srivastava noted that the number of private banks extending loans to the company’s customers has more than doubled since April 2018 -- from six to 13. Similarly, the number of such NBFCs has risen from six to eight.

The finance penetration of India’s largest carmaker, MSIL, increased from 75-80 per cent in 2019 to 76-81 per cent in 2023, according to Jato Dynamics. Srivastava shared the exact numbers, stating that the finance penetration for MSIL increased from 80.3 per cent in 2018-19 to 81.3 per cent in the April-December period of 2023-24.

NBFCs, unlike banks, generally lend money without collateral, enabling them to lend money to people who do not have a credit history or assets for collateral, albeit at slightly higher interest rates. “That is why the credit availability to buy cars in rural areas has increased. That is reflected in the increased share of NBFCs in the overall retail loan market in the automobile sector,” Srivastava noted.

“In the past five years, the share of NBFCs in our total loan book has increased from about 19 per cent to about 23 per cent. This has also helped us in increasing our rural sales,” he further said.

Banks are now coming out with tailor-made products for car-buyers. For example, nowadays, many consumers ask for loans for the on-road price of the car which is different from the ex-showroom price. If a car buyer adds accessories of ~50,000 to his/ her new car, the bank is willing to give the customer a loan on the final price of the car, inclusive of all these expenses and other taxes.

Earlier, banks used to not give loans on the on-road price as the underlying used car market was not so well developed, an auto industry executive said. 

“When the used car market is developed, the value of the asset increases. Therefore, banks now are more confident that when they repossess the cars, they will get some value from it,” the executive mentioned.

There are “step-up schemes” available too, where the EMI will increase gradually with the passage of months or years. Also, there is a “balloon” scheme under which the EMI will remain small for years and, in the end, a big payment has to be made, the executive stated.

Srivastava of MSIL said that if interest rates are increased in 2024, the overall volume could be impacted. “However, the share of financial penetration — which is at 80-81 per cent — is expected to remain the same. Banks could pass on the repo rate hikes to consumers in 2024, so this would impact the growth of finance penetration. But its share is expected to remain the same,” he added.

Explained why the finance penetration data of Jato Dynamics was not in absolute numbers but in ranges, Bhatia said: “This data is based on our research across dealers and interviews. There is no official source data. We developed this base as there was lack of data in this area. So, we used business intelligence using our team. In such a situation, pegging one number was not possible as our research and algorithm were indicating a range.”