Indian small towns go big on auto financing

In India, there's a growing desire for car ownership that's causing a significant increase in auto loans. This trend isn't limited to metropolitan cities alone, but also spreading to smaller cities. As car prices rise, consumers are choosing loans with longer repayment periods to make their purchases more affordable.

Data collected by Jato Dynamics shows that major automobile manufacturers like Maruti Suzuki, Hyundai, Mahindra, Tata Motors, Honda, and Toyota anticipate finance penetration to increase from 64 to 75 per cent in the pre-pandemic era to 75 to 84 per cent in 2024. The statistics reveal that approximately 79.1 per cent of car purchases in India are financed through bank loans or non-banking financial companies (NBFCs). This shows the enduring status of cars as a symbol of social advancement in the world's most populous country.

The inclination towards financing is particularly evident in tier II and III cities, where 75 per cent of buyers opt for loans. This indicates that the aspiration for car ownership has expanded beyond the boundaries of major cities, according to a high-ranking official at a South India-based NBFC.

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While traditional financing methods dominate the market, alternative models such as leasing and subscription services are struggling to gain a foothold in India. Leasing accounts for only 1.5 per cent of the market, while subscription services make up a mere 0.1 per cent. Experts attribute this lack of popularity to regulatory challenges, complicated logistics related to insurance and maintenance, and a cultural preference for outright ownership.

A senior official at a prominent South India-based NBFC pointed out that the absence of GST benefits in leasing makes them hesitant to offer it to consumers. The official believes that leasing is more suitable for specialised leasing companies. In contrast to India, leasing comprises about half of new car sales in mature automotive markets like Europe. The leasing market is projected to grow by 4.5 per cent annually, reaching USD 12.17 billion between 2023 and 2028.

Cash purchases still account for 19.3 per cent of total car deals, representing both affluent buyers and those unable to secure loans, according to experts.

Auto dealers report that finance penetration is growing rapidly. Nikunj Sanghi, a prominent automotive dealer, stated that despite rising vehicle prices, consumers are now open to taking longer-term loans with minimal down payments. He added that the loan-to-vehicle ratio has significantly increased, now exceeding 85 per cent compared to 30 to 35 per cent previously.

Ravi Bhatia, president of Jato Dynamics, suggests that the willingness to take on long-term debt for depreciating assets like cars indicates confidence in future earning potential and economic stability among Indian consumers.

Financiers see great potential for auto loans in the upcoming festive period, which is crucial for consumer goods purchases. Banks and NBFCs are becoming more aggressive by offering competitive interest rates and faster documentation. Self-employed individuals particularly prefer loans, as they can invest their funds in their businesses where the return on investment often exceeds the interest cost, according to an official from a Mumbai-based bank that is a leading auto financier.

With the second half of the calendar year expected to outperform the first half for vehicle financiers, Axis Capital predicts that Mahindra Finance will report a 1.9 per cent Return on Assets (RoA) for FY25. A comparison with Cholamandalam Investment & Finance Company's vehicle finance on key metrics (Q1FY25) suggests that Mahindra Finance's business potential remains strong and should converge to better return ratios as growth accelerates.