Growing aspiration for car ownership is fuelling a surge in auto loans in India, extending beyond the metros to smaller cities. Consumers are also opting for longer-tenure loans to afford higher car prices, say executives.
Top carmakers such as Maruti Suzuki, Hyundai, Mahindra, Tata Motors, Honda, and Toyota expect finance penetration to rise to 75-84% in 2024 from 64-75% in the pre-pandemic period, according to data collated by Jato Dynamics.
About 79.1% of car purchases in India are financed through bank loans or non-banking financial companies (NBFCs), underscoring the car’s enduring role as a symbol of social progress in the world’s most populous nation.
The preference for financing is more pronounced in tier II and III cities, where 75% opt for loans, indicating that the aspirational drive for car ownership is no longer limited to metros, said a senior official at a South India-based NBFC.
While traditional financing dominates, alternative models such as leasing, and subscription are struggling to gain traction in the Indian market.
Leasing penetration stands at a mere 1.5% and subscription at 0.1% of the market. The tepid demand is attributed to regulatory hurdles, complex logistics around insurance and maintenance, and a cultural preference for outright ownership, say experts.
“We don’t get any GST benefits in leasing. Therefore, we are reluctant to offer it to the consumer,” said a senior official at a leading south India-based NBFC, who feels it works better only for dedicated leasing companies.
Unlike India, leasing comprises about half of new car sales in developed auto markets such as Europe. The figure is projected to grow by 4.5% compounded annually to $12.17 billion during 2023 to 2028. Cash purchases still make up 19.3% of total car deals, representing both affluent buyers and those unable to secure loans, say experts.
Finance penetration is growing exponentially, according to auto dealers. “Even though prices of vehicles have gone up, the consumer is now open to taking longer tenure loans, with limited margin money,” said Nikunj Sanghi, a leading automotive dealer. “The loan-to-vehicle ratio has also significantly gone up, to more than 85% against 30-35% earlier,” he said.
According to Ravi Bhatia, president, Jato Dynamics, the willingness to take on long-term debt for depreciating assets like cars suggests confidence in future earning potential and economic stability among Indian consumers.
Financiers, too, see a huge potential for auto loans in upcoming festive period, the most crucial period of a year for consumer goods purchases. Banks and NBFCs are getting aggressive by offering competitive interest rates and faster documentation while the self-employed preferring loans. “They prefer to deploy funds into their business as the return on investment is more than the interest cost,” said an official of a Mumbai-based bank, a leading auto financier, highlighting the factors behind the loan demand.
With the calendar second half expected to outperform the first half for vehicle financiers, “we expect Mahindra Finance to report 1.9% RoA (Return on Assets) for FY25,” Axis Capital said in a recent report.
