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Used
Commercial Vehicle Financing: An Uncharted Territory in Retail Finance Rajnish Rastogi, Head, Research, CRIS INFAC Over the next few years, a new breed of lending assets is set to increase its presence in the retail portfolios of banks. These are used commercial vehicle (CV) finance, used automobile finance, and personal loans, which are currently considered sub-prime (high yield, high margin) assets, in contrast to prime (low yield, low margin) assets. The sub-prime assets exhibit the following characteristics: high volumes, high growth, high yields, low competition and relatively low losses.
Used CV finance, used automobile finance and personal loans have traditionally been serviced either by niche non-banking finance companies (NBFCs) or by local moneylenders who charge exorbitant interest rates. The entry of organised players is expected to lower financing rates from current highs, thereby expanding these markets, while ensuring good returns for organised players. Comparative analysis of various retail finance markets Used CV finance market, which includes finance availed at the time of purchasing a used vehicle and also refinance taken with the CV as collateral, is a Rs. 90 billion market, with large ticket sizes, high yields of 16 per cent and estimated to grow at a rapid rate (19.5 per cent annual growth rate). In comparison, the new CV finance market, which deals exclusively with finance availed at the time of purchasing a new vehicle, is pegged at only Rs. 183 billion growing at only 5 per cent annually and has average yields of 6 per cent. The table below clearly highlights the attractiveness of the used CV finance market in comparison to prime lending markets. Low cyclicality in used CV finance market Given the penetration in used CV finance, growth in the used CV financing market is non-cyclical, while in the new CV financing market growth is highly cyclical.
Finance penetration driving growth in used CV finance market The willingness of financiers to finance older CVs is driving growth in the used CV finance market. At present, organised players finance CVs up to 8 years old, while unorganised players finance even older vehicles. This trend of financing older vehicles is expected to continue and will help in the growth of the used CV finance market over the next 5 years. More headroom for organised players Organised players (banks and NBFCs), excluding the Shriram Group, hold only close to 25 per cent of the used CV finance market. Within the organised segment, large players have more than 85 per cent share in the new CV finance market, while they hold only 18 per cent share of the used CV finance market. This means that large organised players have plenty of room to grab market share from unorganised players. In addition, high yields of 22 per cent, low credit losses (150-200 basis points) and high net margins (500-600 basis points) make used CV finance an attractive market for organised retail finance players.
Regional variations in used CV financing The used CV finance market shows regional and product level variations. Yields and margins are higher on light commercial vehicle (LCV) financing than on heavy commercial vehicle (HCV) financing. Further, finance penetration (which is around 60 per cent on a national level), yields, margins, player market shares and other market characteristics vary with regions. Organised players planning to service the used CV financing market need to give careful consideration to these regional variations.
Tapping this market Organised players looking at servicing the used CV financing market can enter this market through the organic route, the inorganic route or through tie-ups. Organic entry A financier can start by providing finance to a relatively younger fleet, that is, vehicles that are 2-4 years old. As comfort levels increase, financiers can start funding a fleet of up to 6 years, then gradually 8 years and so on. Alternatively, the financier can begin by targeting operators who have a fleet of 3-4 CVs. With maturity, the financier can start providing finance to operators with 2 CVs and gradually start providing finance to single CV operators. Inorganic entry Large players who have low cost of deposits but suffer from limited reach or lack understanding of the market dynamics can look at acquiring smaller players or regional players. Tie-up with niche players Financiers can also tie-up with niche players who have superior industry knowledge and well-established customer acquisition networks. Such tie-ups and relationships with niche players have assumed importance, given the intensity of competition. For instance, Citicorp Finance and UTI Bank have tie-ups with the Shriram Group. |
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