10 commandments of
Captive auto financing
in India
February 2016
The Indian auto and auto finance industry is steadily
moving toward recovery
1
Improving socioeconomic
environment
►
►
2
Turnaround in
auto industry
►
►
►
3
4
5
PV Finance
largest and
expected to
grow
►
►
PV finance
market is
evolving
►
Used car
financing is
also growing
►
►
►
Current Account Deficit declined from a peak of 6.7% of GDP (in 3Q, 2012–13)
to an estimated 1% in 2014–15, 26% growth in FDI in 2015
10% growth in disposable incomes, 2/3rd of Indian population in working age
GDP growth
projections FY16
7.5%
The Indian automotive industry is moving on its path of recovery, and is
expected to gain further impetus in the medium term, mainly driven by:
Economic growth
Reduced fuel prices
Government’s focus on road development
Expected 5 year
CAGR: ~12%
PV finance forms the largest segment of auto financing Industry at ~INR 761
Bn (~60% share).
PV finance penetration set to grow again buoyed by underlying asset sales,
new customer segments and entry of new players in the market.
Expected 5 year
CAGR: ~17%
Entry of fleet operators has created a new customer segment; rural market
continues to grow; financiers have to innovate faster to tackle competition
Ubiquitous nature of internet usage has made customers more knowledgeable,
demanding of hassle free service and bundled products and services
Ability to
innovate has
become critical
The used car market is currently 1.2X of the new car market, with organised
share of used car financing at 14% only
The average age of used cars is 4 years and reducing product lifecycle will
ensure further penetration
Expected CAGR
14%%
*Source: SIAM, RBI Data, EY Analysis
Page 2
Auto financing market in India – Point of view
Captives are emerging as a key driver of growth and
innovation in the Industry
►
6
Emergence of
captives
7
Credit risk is
being managed
well
8
Profitability
needs to be
watched closely
9
►
►
►
►
►
►
►
►
►
►
Commandments
for success
►
►
►
►
►
►
►
►
►
Most foreign OEMs have set-up captive financing companies in India to improve
finance penetration and encourage sales
Captives are allowing OEMs to re-engage with customers post car sale
Captives support dealers by offering suitable financial support and encourage
finance penetration through wholesale-retail linkages
Increased coverage of target customer segments through credit bureaus
Use of credit scoring models and appropriate pricing of risk by market leaders
Multi-layer verification process by leveraging outsourced agencies
Evolving digitally enabled collections techniques
Being a low margin product, ROAs on this business have typically not been high
Funding cost is a key driver, multiple instruments are available today to drive
these down
Yields are being managed through a balanced portfolio mix of high yield
segments, used car financing, and cross-selling
Move away from generic products to targeted customer propositions
Be nimble, target the rapidly emerging customer segments
Fulfil ownership and mobility needs through lending and leasing propositions
Enhance brand value, reduce product lifecycle, and improve dealer profitability
and yields through used car financing
Leverage asset tested customer base to grow beyond single product exposure
Deploy advanced credit assessment measures to price the risk appropriately
Limit credit losses through a robust collections framework
Create best in class customer experience by enabling faster approvals
Keep funding costs under control through appropriate mix and parental support
Maintain ROA above 2% by deploying these principles
*Source: SIAM, RBI Data, EY Analysis
Page 3
Auto financing market in India – Point of view
~11-13% share of
captives in auto
finance market
NPAs of 0.5-0.6%
in the industry
ROA 1.5-2.25%
for market
leaders
360 degree
approach to
business
Table of contents
1.
The automotive
environment
2.
The auto finance
market
3.
10 commandments
4.
About EY
The automotive
environment
Driven by stable economic growth, increase in consumption
pattern and proportion of working age group..
Improving household consumption patterns over next10 years
India’s GDP per capita expected to exceed US$2,000 by
2017
3%
12%
2103
6%
22%
1430
47%
48%
1508
29%
21%
2011
2010
45%
50%
1627
1496
2011
2012
2013
2014F
20%
34%
37%
1808
1522
12%
2015F
2017E
Source: IMF
5%
2020
2015
2025
Real–rich
(INR360,000 and above)
Upper–class (INR240,000 to
INR360,000)
Prospering (INR120,000 to
INR240,000)
Evolving (INR60,000 to
INR120,000)
Emerging (INR30,000 to
INR60,000)
Surviving
(Below INR30,000)
Source: Kotak Institutional Equities Research
Increase in working population age group
India’s favorable demographics (age groups)
Female
(millions)
2%
10%
1%
4%
7.5
14.8
25.8
4.8
47.9
17.1
52.5
23.6
27.6
56.3
31.7
58.1
36.3
58.5
58.1
57.1
2010
2050
15-64
65-79
Source: United Nations, Department of Economic and Social Affairs
9.5
12.6
54.9
0-14
6.1
32.7
41.0
68%
80+
40.8
46.4
51.1
55.9
55.3
54.6
57.7
53.1
58.6
51.4
59.4
49.8
61.6
1.2
3.1
23.3
65%
0.1
0.0
0.7
0.1
2.8
0.4
95…
85…
80+
70…
60…
50…
40…
30…
20…
10…
0-4
0.1
0.0
0.4
0.1
1.8
0.3
1.0
Male
(millions)
5.1
2.5
11.0
2050
18.4
28.8
8.3
38.6
11.8
47.5
17.0
54.2
24.6
57.8
29.2
60.0
33.8
62.3
38.9
63.0
43.9
62.8
50.0
55.4
61.8
60.6
60.2
59.2
63.2
57.5
64.0
55.7
64.8
53.9
66.9
Source: United Nations, Department of Economic and Social Affairs, accessed 7 June 2013
Source: United Nations, Department of Economic and Social Affairs, accessed 7 June 2013
Rise in middle class and working population
to fuel the growth of auto finance
Page 6
2011
19.0
Auto financing market in India – Point of view
...and emergence of new fast growing and high OEM
focus segments such as mini, compact and UV..
FY15: PV Industry segment mix
Vans, 6%
FY20E: PV Industry segment mix
Micro, 1%
Mini, 20%
Vans, 8%
Micro, 1% Mini, 15%
UV, 21%
UV, 29%
Compact, 32%
Premium, 0.2%Luxury, 1%
Executive, 1%
Mid Size, 7%
Super
Compact, 2%
Premium,
0.2%
Compact, 41%
Luxury, 2%
Executive, 1%
Mid Size, 9%
Super
Compact, 4%
Micro
Mini
Compact
Super Compact
Mid size
Executive
Premium
Luxury
Price Range
(INR)
Below 250K
250 – 450K
450 – 800K
600 – 800K
750K –
1.2Mn
1.3 –
1.85Mn
1.85 – 3Mn
Above 3Mn
Body Style
Hatchback
Hatchback
CAGR (FY16EFY20E)
17%
6%
Sedan/Estate/Hat Sedan/Esta
ch/Notchback
te/Notch
Sedan/ Estate/ Hatch/ Notchback
7%
29%
17%
17%
49%
13.5%
Level of
competition
Top OEMs
Tata
Maruti,
Hyundai,
Chevrolet
Maruti,
Hyundai,
Tata
Toyota, Maruti,
Mahindra
Honda,
Maruti,
Hyundai
Toyota,
Hyundai,
Fiat
Skoda, Toyota,
Hyundai
Source: SIAM,, EY Analysis
Segment mix is by number of units
Page 7
Audi,
Mercedes,
BMW
High
Auto financing market in India – Point of view
UV
Van
UV 1,2,3 Up to 1Mn
600K – 1.5Mn
Utility (SUV/
MPV)
Box
19%
17%
UV 1,2,4 –
UV3
V1
V2
Mahindra,
Maruti, Ford.
Hyundai, VW
Maruti,
Tata,
Mahindra
Moderate
Low
..the automotive sector in India is expected to
rebound
PV market is expected to grow at a CAGR of ~12% over next 5 years
-6.1%
3.9%
2.6
2.7
2.5
2.6
FY12 Actual
FY13 Actual
FY14 Actual
FY15 Actual
Total PVs
FY16
FY17
FY18
4.1
FY19
12.9%
4.6
FY20
PV Y-o-Y Growth
►
India is expected to witness high growth in PV over 2016-20 period as the
economic environment improves amid a strong reform push by the new
government
►
From the current year of 2015, the CAGR for the industry is forecasted at around
12%, taking the overall PV volume close to 5 million units annually
►
This growth is forecasted on the back of a assumption of positive GDP growth of
around 7% (CAGR) and numerous new launches, country specific models, along
with high technology adoption
Source/s: SIAM, LMC Automotive , BMI Automotive, EY analysis
Page 8
3.6
3.2
2.9
12.5%
Y-o-Y Growth
Sales in Million
2.3%
12.1%
11.8%
11.4%
Auto financing market in India – Point of view
►
India is expected to witness high growth
(10.7%) in PV density over 2012-18 period
as compared to 2.6% for the world and
4.0% and 4.4% in Brazil and Russia,
respectively.
►
India PV parc is expected to exceed that of
Brazil by 2018, while mature markets like
Western Europe and Japan are expected to
witness stagnation in PV population.
The auto finance
market
The Indian auto financing market has gone through
several peaks and troughs over the last 17 years…
1998 ~2006
►
Business
circumstance
Strong auto sales growth (~20%) and
liquidity in economy attracts banks
►
►
►
Financier
needs
Aggressive to capture auto financing
market share
►
No specific financing needs
►
►
OEM Financing strategies
2010 ~ 2015
Liquidity crunch, rising defaults force
leading financiers to exit the market
~75 bps increase in auto loan interest
rates dampens sales growth (~9%)
►
Intense competition leads to reduced
interest rates, product innovation
Reluctance to lend to retail segment
►
Focus on building strong OEM
relationships
Focus on increasing penetration and
volumes
►
►
OEM needs
2007~2009
Seek to Increase focus on semiurban/rural areas
Focus on relationship with financiers
All OEMs; some OEMs tie up with local
market NBFCs to increase rural focus. (For
example, Maruti ties up with MMFSL)
►
►
Consolidate/strengthen market position
Improve dealer control and profitability
Financier
tie-ups
All OEMs
White-label
finance
Maruti tied up with Citicorp Financial to
form Citicorp Maruti Finance Ltd. (CMFL)
Indian
captives
Mahindra & Mahindra and Tata Motors
Mahindra & Mahindra and Tata Motors
Mahindra & Mahindra and Tata Motors
Foreign
captives
Limited presence; GMAC,
Ford’s JV with Kotak
Existing players exit; no new entrants
VW (VW, Audi, Skoda, Porsche), BMW
Daimler, Toyota, Renault-Nissan, Ford
No white label financiers in market after CMFL experiment failed
Source: EY analysis, market insights
Page 10
Maruti, Hyundai, Honda, GM, Fiat
Auto financing market in India – Point of view
…and is poised for a breakout again, on the back of
climbing PV sales
Vehicle sales have turned positive and are expected to continue the growth over next 5 years…
FY11E
FY12E
FY13E
FY14E
FY15E
CAGR
FY16E
FY17E
FY18E
FY19E
FY20E
CAGR
Volume
(Mn)
2.5
2.6
2.7
2.5
2.6
1.0%
2.9
3.2
3.6
4.1
4.6
12.2%
Value
(INR Bn)
1,192
1,289
1,392
1,341
1,450
5.0%
1,621
1,828
2,101
2,475
2,832
15.0%
…New PV finance disbursements have turned positive and will continue to grow
LTV
~70%
Penetration
~75%
~75%
CAGR: ~6%
~77%
CAGR: ~17%
601
650
711
694
761
868
997
1,169
1,403
1,636
FY11E
FY12E
FY13E
FY14E
FY15E
FY16P
FY17P
FY18P
FY19P
FY20P
The new PV finance is market is attractive for new entrants due to current substantial size, high finance penetration and
strong underlying asset sales, which will continue to drive the market growth in the future
Source: SIAM, Mahindra Financial Services, EY Analysis, Insights gained from market discussions
Page 11
Auto financing market in India – Point of view
NBFCs and captives have emerged as the growth
engines of the auto financing industry..
Changing competition landscape in new PV finance
Outstanding vehicle finance book (INR Bn)
~700
4-6%
10-12%
35-37%
~1,000
~1,700
9-11%
11-13%
14-16%
17-19%
29-31%
22-24%
While multiple financiers exist in the market, top 10
players account for ~80% share of the new PV
financing market
Pvt.
Bank
The top 3 private sector banks dominate the market due to
their wide customer base, competitive rates, customer
service and cross-selling supported by aggressive marketing
and wholesale financing tie-ups with dealers.
PSU
Bank
Except for the largest PSU bank, most of the other banks
have lost significant share due to rising NPAs and tight credit
environment following the crisis. They compete
predominantly using competitive pricing and low service
costs.
NBFCs
47-49%
44-46%
45-48%
FY10E
FY12E
FY15E
Captives
Captives
NBFCs
Public Sector Banks
Independent NBFCs have increased their market share by
expanding to non-metro areas and catering to high risk
customers to whom banks are hesitant to lend and flexible
processes to accommodate a wide set of customer profiles
Captives such as have increased their share by largely
catering to rural areas (Indian captives) or offering
subvention linked innovative products (foreign captives).
They are known for customized loan offerings and bundled
products
Private Sector Banks
Source: Company annual reports, India Ratings and Research reports, EY analysis
The new PV financing is highly competitive in nature with private sector banks holding on to market share; NBFCs and
captives have been able to garner market share by identifying niches in terms of under-catered regions or innovative products
Page 12
Auto financing market in India – Point of view
..and have been particularly successful in “bank ignored”
niche segments such as premium and low income…
1
2
S
C
Private and PSU banks
► Low risk: low yield
► Dealer and direct channels
important
►
M2
M
2
3
KP
NBFCs and Indian captives
► High risk: high yield model
► DSA and dealer important
►
Foreign captives
High-end customer segment
► Dealer is most important
►
►
TM
1
SB
HB
3
V
Yield
Risk
IB
Self employed: without
income proof
Low Income
Segment
Profile
Banks
Page 13
NBFCs
Self employed: with
income proof
Middle income
Captives
D
B
Salaried: private and
government
High Income
S: Large South Indian NBFC
M: Large rural/semi-urban NBFC
C: Large diversified NBFC
MM: Rural focused auto finance
Auto financing market in India – Point of view
TM: Large Indian captive
V: European captive finance company
D: Luxury car finance company
B: Luxury car finance company
SB: Large public
sector bank
IB&HB: Large
private sector
banks
Emergence of
captives
The role of captives is set to evolve from enabling OEM’s sales growth
to driving customer lifecycle engagement, dealer profitability, product
innovation, and greater credit access to the customer.
OEM
Objective
of Captive
Key stakeholders
Dealer Profitability
and Control
Incremental
sales
Goal
Offer product, customer
segment and geography –
specific schemes
Potential to enhance
residual/resale value and
increase used car sales
Potential to improve dealer
relationship and control by
providing inventory and
other fund requirement
Improved profitability due to
incremental sales and
increased in-house finance
penetration
Potential to improve after
sales revenue by offering
bundled products
Ability to develop a customer
database, use analytics and
leverage for re-sell and cross
sell
Potential to improve
customer relationship by
offering “one stop solution”
through bundled products
Opportunity to improve
customer loyalty
Post-sale
Re-purchase
Ability to independently
conduct creative marketing
campaigns
Ability to bridge existing
credit gaps and increase
sales
Pre-sales
Sale
Car lifecycle
Page 15
Brand
enhancement
Potential to offer
differentiated finance
schemes with subventions to
increase sales in urban areas
Customer
Engagement
Dependency on
existing financing
channels
Improved Group Profitability
Auto financing market in India – Point of view
...hence, most foreign OEMs have adopted the captive
route to improve finance penetration
European
OEMs
0.6%
0.4%
0.4%
1.8%
1.8%
0.3%
Medium
Indian OEM
9%
16%
6%
►
Enhanced dealer relationship
management
Indian OEMs with captive
financing set ups
2
Indian OEM
45%
American OEM Indian OEM
►
Reduced finance penetration due
to focus on rural segments
►
Offer a combination of
standardized and customized
products
American OEM
7%
Japanese OEM
Finance penetration
Financing through tie-ups:
Banks and NBFCs
3
1.8%
Korean OEM
100%
Size of bubble represents market share (FY’15)
Source: Company annual reports, India Ratings and Research reports, EY analysis
Page 16
Increased usage of
differentiated products
3%
3
50%
►
5%
Japanese OEMs
2
Foreign OEMs with captive
financing set ups
1
1.7%
European
Low
Financing product differentiation
High
1
OEM categorization
European
Auto financing market in India – Point of view
►
Standardized finance product
offerings and cash discounts
►
Very high penetration by market
leader
…and drive OEM sales through subvention schemes and
differentiated products such as buyback guarantee, balloon
Share of alternate products in total financing
Auto sales and finance growth
12%
10%
Less than 1% usage of alternate
products – combined share would
be less than ~5%
11.0%
Alternate products
have a high share in
overall financing
10.0%
9.0%
8%
6%
4%
2%
0%
3.0%
0.5%
0.1%
0.1%
0.5%
1.0%
0.0%
Indian American Korean Japanese American Indian
OEM
OEM
OEM
OEM
OEM
OEM
No Captive
1.2%
1.5%
0.5%
Indian Japanese European European Japanese European European European European
OEM
OEM
OEM
OEM
OEM
OEM
OEM
OEM
OEM
Indian Captive
Foreign Captive
Implications for Captives
Observations
►
►
Alternate financing products such as leasing, step-up, stepdown payments etc., are preferred by luxury segment
customers
Source: insights from previous work done and inputs from market discussions,
Page 17
1.5%
0.5%
►
►
Alternate products enhance overall customer value proposition
A captive can attract premium customer segments by adding
differentiated products to their finance offering
Data analytics can be deployed to understand customerbuying behavior
Numbers are approximations based on market discussions
Auto financing market in India – Point of view
Dealer financing, besides addressing the financial needs of the dealer,
leverages the wholesale-retail linkage to drive retail penetration..
Address all financial needs of dealers
1
Dealer requirement
Captive support
Sustain business
Working capital
Grow existing business
Inventory funding
Expand
Flexible Inventory Funding Terms
Credit free
periods
Term Loans
(additional showrooms)
3
2
Retail sales with Wholesale-Retail Linkage
Relaxed
payment
scheme
Captive +
OEM
Inventory
funding rate
Retail rebate
Retail target
achievement
Support in
difficult
times
Dealer
Page 18
Auto financing market in India – Point of view
►
Offer 30-day, credit-free period
for inventory funding for select
dealers
►
Flexibility and relaxed norms for
re-payment such as staggered
payments
►
Relaxation of penal interest
charges on a case-to-case basis
►
Support the dealers in downturns
to help develop a robust
relationship
Captives have also been successful in improving customer
engagement across the financing touch points along the auto lifecycle
Auto-purchase cycle
Pre-sale Enquiry
Sale - Auto purchase
Post sale - Service and maintenance
Replacement
Touch points
Lean period after expiry of free warranty
Additional touch points generated due to Captive
financing
Auto-finance cycle
Marketing
finance
schemes
Customer
enquiry
Page 19
Application
Customer fills
application forms
and submits all
documents
Loan disbursement
Servicing
Contact center notifies the
customer on payment due/
updates address and contact
details
Dealer notifies the
customer about
loan disbursement
Collections and
recovery
Contact center
connects with
the customer
for collections.
Auto financing market in India – Point of view
Cross-sell/upsell
Cross-sell re-finance/topup/ to select customers
Finance schemes
to influence repurchase
Support repurchase with
buy-back and
used car
financing
The 10
commandments
1. Move away from generic products to targetted
“Customer value propositions”
Key customer segments
Car segments
1
First time buyers
2
Compact
3
Mid and
Compact,
SUV
Fleet Taxi segment
(Drivers)
SUV
Page 21
• Flexible and affordable finance schemes
• Subventions and High LTV schemes
• Re-payment flexibility
• High LTVs and longer tenure schemes backed by
risk-based pricing
Rural segment
• High LTVs and longer tenure schemes backed by
risk-based pricing
• Schemes designed according to income pattern
Mass urban
• Subventions and products such as bundling and
EMI structuring
• Ease of loan documentation
4
5
Premium,
A captive’s value proposition
High income group
• Subvention and bundled products; buy back
guarantee
• Ease and reduced TAT of loan documentation
Auto financing market in India – Point of view
2. Be nimble, target the rapidly emerging customer
segments
Segment characteristics
Captive’s segment
strategy
Low/middle income;
difficult to get bank credit
Providing
affordable finance
Customer segments
Fleet/taxi
►
Fleet Taxi segment
(Drivers)
Avg. share of PV sales
is ~10%
Rural
►
►
Low irregular/seasonal
income; difficult to get
bank credit
►
Rural segment
Avg. share of PV sales
is ~20%
Page 22
Low/middle income, prefer low
immediate cash outflow
Usually do not qualify for loans
from private banks
Target customers for local
NBFCs with high interest rates
►
►
►
Low income
Irregular/seasonal income
Limited reach of banks/usually
do not qualify for loans from
private banks
Target customers for NBFCs
with high interest rates
►
►
Focus on providing
affordable finance
Tie ups with big fleet/
taxi players, for
background checks
and risk mitigation
Making finance
available
►
Focus on availability of
finance
Auto financing market in India – Point of view
Captive value proposition
Re-payment flexibility and
bundled maintenance
contracts
►
►
►
High LTVs and longer tenure schemes
with risk-based pricing
Schemes designed according to
income pattern, such as daily
repayment mechanism
Bundled discount on extended
warranty and annual maintenance
High LTVs and long tenure
credit schemes with high
interest rates
►
►
High risk: high reward model
Schemes designed according to the
income pattern for rural customers,
with flexibilities on re-payment
3. Fulfil ownership and mobility needs through lending and
leasing propositions
# Units
Avg. Ticket Size
Projected
growth
(till FY20)
2.6 million
~1.9 million
~21,000
~INR 530,000
~INR 380,000
~INR 1,000,000
~12%
~18%
10-15%
Car Sales
(INR Bn)
PV loan disbursements
Incremental PV leasing
1,374
761
21
PV Market
PV Loan
PV Lease
►
Indian car leasing market in India has a limited presence, largely
dominated by India subsidiaries of global leasing companies.
►
Leasing is prevalent in car price segments of more than INR 500,000
in Compact, Mid-size and Luxury
►
While the total cars under leasing are at ~70K, the current leasing
penetration of corporate sales is ~10% as compared to ~60% in
European markets indicating the potential for future market growth
1
Growing passenger vehicle
market with widening product
portfolio, increasing sales of
luxury cars and geographic
penetration
2
Increased disposable income
and aspirations leading to
increased vehicle replacement
trends
3
Increasingly corporates are
looking for better expense
management; impending arrival
of GST regulations
4
Increasing leasing product
offering by existing leasing
companies. Furthermore new
trends such as entry of OLA
cabs into leasing business to
grow radio taxi business
►
Captives are looking at leasing proposition to drive sales of higher
brand vehicles
►
Large Indian OEMs are promoting leasing through internal divisions
Source: SIAM, EY analysis
Page 23
Key drivers for auto leasing in India
Car leasing market in India has a limited share of the market (FY15)
Auto financing market in India – Point of view
4. Enhance brand value, reduce product lifecycle, and improve
dealer profitability and yields through used car financing
Captive’s used car proposition
Used car exchange
program/ buy-back
schemes
1
Buy-back schemes will enhance and
safeguard residual value of the cars
2
3
Buy-back schemes/used car financing
will allow a ready supply of good
quality/certified cars for resale
Leverage reduced product life cycle of
three years and up-sell next segment
car to existing customer
Offer buy-back guarantee before
the end of the product life cycle to
achieve higher residual value
0
1
2
3
Upsell the next product
with attractive finance
schemes
Captive
OEM
Used car Financing
2a
1
Buy back
guarantee
Used car sale
New Car sales
Used Car
New Car
2b
Customer information
database
Leverage the customer database to
upsell the next product
4
No of Years
Page 24
~40% of
Customers change
the cars within
4 – 6 years,
followed by
~30%
which do in
2-4 years
Auto financing market in India – Point of view
2-4 years
Repurchase
cycle reducing
to three years
~40% of the
used car
buyers are
below 30
years of age
5. Leverage asset tested customer base to grow beyond
single product exposure
Phased approach of
retail products
Used car
financing
Breakout
phase
High Tenor
High LTV
Expansion
phase
Flexible EMI/
step up
Bullet/ balloon/ step up
Setup phase
Yield/risk
Car Leasing
Captives can improve
yields by offering product
variants such as used car,
high tenor, high LTV,
balloon etc products. Once
stable, they can even
leverage asset tested
customer base to offer
semi-unsecured and
unsecured products based
upon repayment track, at
higher yields.
Page 25
Exchange/
buyback
Bundled
products
Extended topup/ refinance
Strategic
segments
Auto financing market in India – Point of view
New vanilla
car financing/
subventions
Volume
segments
6. Deploy advanced credit assessment measures to price the
risk appropriately
Leading
practices
Some large Indian captive finance companies have deployed a risk based pricing models, which provide interest rate and
LTV based on customer risk profile and asset quality of the geographic location of the customer
Scoring
oring
parameters
meters
Scoring decision
Process decision
Typical profile
►
Profile
e related
►
Score Band 1
Fast track
approval
Standa
Standard
ard
r
approval
ap
pp
prrov
ova
val
al
►
Score Band 2
Income
e related
Credit
it track
record
cord
Micro-market
-market
based
ased
Page 26
►
►
S
Sc
Scor
cor
ore
re Band
Ba
and
nd 3
Score
Referral
Ref
ferral approval
►
►
Score Band 4
Rejected
►
Weight
Underwriting
decision
10%–20%* customers
Premium profile customers
can jump the queue and
provided fast track
approvals
15%–
25%
25
2
5%
40%–50
40%–50%*
50%
50%*
50
%** ccustomers
usssto
u
ome
mers
rs
Regular
Re
R
egula
ar approval
appr
appr
ap
pro
ov
val
al pro
process
rro
ocess
hours)
(2-24
(2
2
h
ours)
35%–
45%
20%–25%* customers
Detailed subjective credit
underwriting
15%–
20%
Maximum LTV
15%–20%* cases
Rejected upfront to improve
process efficiency
5%–
19%
Risk-based pricing
Auto financing market in India – Point of view
Maximum
fina
financing
na
n
ancing amount
Maximum tenor
7. Limit credit losses through a robust collections framework
Mid buckets
Early buckets
Current Due
Bucket 1
(DPD 0-30)
Bucket 2
(DPD 31-60)
Bucket 3
(DPD 61-90)
Hard buckets
Bucket 4
(DPD 91120)
Bucket 5 onwards
(DPD 120+)
Objective
Prevent delinquencies
Collect better to minimize flow
Recover as much as possible
Ownership
In-house + Outsourced
In-house + Outsourced
Largely outsourced
Collaboration
Sales involvement for non-starter,
early defaulters
Legal involvement
Extensive use of legal
Activity
Tele-calling and SMS/IVR reminders
Field collections Restructuring
Repossessions and recovery
Analytics
Decision trees
Collections score-cards
Repossession agencies
IT tools
• Centralized Collections IT system to track bucket wise case movement
• Exhaustive MIS (Bucket/Asset/Collector wise flow and normalization performance) and Analytics
• Hand-held devices for field collectors with receipt generation capability
Leading
practices
Page 27
A rural finance company requires Sales
Executive to handle early bucket
collections to encourage right sourcing
and manage customer relationships
Leading private sector banks monitor
pre-NPA accounts stringently and use
legal effectively
Auto financing market in India – Point of view
NBFCs dealing in cash
collections utilize mobile apps
for tracking of collections
force; online sale of
repossessed vehicles for faster
disposal
8. Create a best in class customer acquisition experience
by enabling faster approvals
Application
1
Awareness
/knowledge
Underwriting
2
3
Select and apply
Loan processing
(Soft approval)
Disbursement
4
5
Loan sanction
(Hard approval)
6
Disbursement
Documentation
48-72 hours
24-72 hours
1.1 Customer is
informed about auto
finance product by
the DSE*
2.1 Customer
provides basic
information for prequalification
3.1 Hygiene checks
performed at Bank
processing unit
4.1 Field Investigation
and Telephone
Verification triggered
as applicable
5.1 List of predisbursement
documents shared
with customer
Verification of
original documents
Customer receives
targeted marketing
offers for auto loan
products
2.2 DSE suggests
financing product/
provider as per
customer profile
3.2 Basic eligibility
criteria verified (e.g.
income, CIBIL, dedupe, ITR checks)
and sample RCU
4.2 Credit assessment
conducted as per
internal scoring models
5.2 Customer drops
off documents at the
dealership/ branch
Execution of loan
agreement at
customer office/
residence or bank
branch
Customer visits the
financier’s branch/
website/ mobile
banking to obtain
information
2.3 Customer
provides initial
documentation to
the DSE
3.3 Soft approval
communicated to
the dealer/
customer
4.3 Deviations checked
and approvals taken as
per authority matrix
5.3 FE visits
customer to collect
the documents from
customer’s
residence/office
Dealer submits down
payment receipt
Customer compares
financier products
through TPT
websites such as
bankbazaar,
cartrade etc.
2.4 FE* logins the
customer application
and uploads scanned
copy
3.4 Customer
decides to proceed
or refer alternative
financiers for better
offer
4.4 Approval
communicated to
customer/ dealer
5.4 Physical file
transfer from
dealership to
financier office
Loan disbursed to
dealer
Customer receives
pre-approved loan
offer basis existing
relationship with
financier
Dealer given a portal
access integrated
with the financier’s
systems
Customer tracks
application status
through Net-banking/
Phone-banking
Dealer Sales
Executive
Page 28
Call center
executive
Digital
Finance
executive
Field
agents
Financier systems
Dealer-led
Auto financing market in India – Point of view
Bank-led
Third party-led
Pain
points
Standard
Practice
Leading
Practice
9. Keep funding costs under control through appropriate
mix and parental support
1
Sources of
funds
Liquidity risk is not a major concern for NBFCs in India. Multiple liquid debt instruments such as bank borrowing,
CPs, NCDs and ICLs are available from the Indian market. Recently, a new instrument of rupee-denominated bonds
that can be issued in the international markets has been permitted
Parent support
Letter of comfort, corporate guarantee from global parent can improve credit rating and has a positive impact on
borrowing costs to the extent of 1%–2%
FPI route
Global parent can invest in the debt borrowings (CPs and NCDs) issued by the Indian finance entity, through the FPI
route
Rating and
security
Issuing NCDs requires a minimum credit rating of “A2” and issuing CPs requires a credit rating of “A3”; furthermore,
all NCDs, including short-term NCDs should be fully secured thus rating and security are key considerations for a
NBFC
2
3
4
5
Cost of funds
While the equity component varies, the cost of funds ranges between 8.5%–11% for majority of finance companies
Asset Liability
Management
~20%–50% of outstanding book is typically short term in nature; Most entities have an ALM mismatch in the initial
years, diverse funding sources available in the later years reduce the ALM mismatch
6
Page 29
Auto financing market in India – Point of view
10. Maintain ROA above 2% by deploying these principles
Bank
NBFC
Interest
income
Cost of funds
13%
NBFCs have higher lending rates on account of higher
cost of funds than banks, which rely primarily on lowcost deposits for funding
NBFCs rely on expensive market instruments such as
bank loans, NCDs and CPs driving up cost of funds
8.5%
4.5%
Fee income
0.5%
Total income
5%
Opex
2.5%
Banks have a higher allocated opex, which consists of
employee expenses, branch expenses, technology and
also increased compliance costs
0.5%
Credit losses in the industry are stable at 0.4-0.8%
2.0%
Overall NBFCs make a higher RoA than banks over the
long term on account of higher yields and portfolio mix
RoA
Page 30
Cost of
funds
Margin
Margin
Credit losses
Interest
income
Fee income primarily includes processing fee on loans
Auto financing market in India – Point of view
10.5%
6.0%
4.5%
Fee income
0.5%
Total income
5.0%
Opex
Credit losses
RoA
3.0%
0.5%
1.5%
About EY
EY has significant capabilities across the auto financing
value chain
1
Strategy and
Business model
Brand strategy
CUSTOMER
MANAGEMENT
Segmentation and
Profiling
SALES AND
MARKETING
Campaign
Development and
Management
Products selection
Advertising and
Campaigning
Customer Service
Branding and
Marketing
Customer Grievance
redressal
Rewards and
Loyalty
Product
Development and
Management
Customer
profitability
Sales force
Effectiveness
Customer Life
Cycle Management
3rd Party Products
distribution
4
Organization
Structure and Roles
Manpower Planning
Employee Cost
Optimization
6
Business
Page 32and IT
alignment
STRATEGY AND PLANNING
Corporate
Market
communication
assessment
FINANCE
Investment and Break
even
Capital Structure
2
Vision and
Mission
Technology
Architecture
Balance Sheet
Management and ALM
ROE / ROA
OPERATIONS AND
PROCESSES
End to end
Workflow
DEALER FINANCING
Retail back Office
Operations
Subvention
Centralized
processes
Loss sharing
Integration with
dealers / vendors
Limit
management
Inventory funding
3
CHANNEL
MANAGEMENT
WC funding
Process
Automation
Inventory
monitoring
5
Credit Risk
Market Risk
Operational Risk
Internal control &
Fraud Management
Digital capabilities
Call center/IVR
(outbound,
inbound)
Service Levels
Treasury
Operations
5
Governance
External vendor
management
Talent Attraction and
Retention
TECHNOLOGY
IT Sourcing and NBL assistance
Loan Origination
vendor mgmt
Solution
RISK MANAGEMENT
ANDTREASURY
Branch Network
HUMAN CAPITAL MANAGEMENT
Talent Management
HR Systems and
and Skill Upgradation
Processes
Performance Management
and Incentivization
Transfer Pricing
Dealer Operations
Process
Documentation
Partnerships
and alliances
Operating model
Legal, Compliance
and RBI reporting
Leadership Development
and Succession Planning
Change Management
Helpdesk and
Support
Enterprise
Control
EY’s Automotive team comprises of ~7300 practitioners
across the world
EY Global Automotive Practitioner Network
Americas
2497
EMEIA
2840
UK
180
U.S.
1556
AsiaPac
1550
Germany
827
China
Korea
873
117
France
178
Italy
161
Mexico
333
Auto financing market in India – Point of view
Japan
444
Thailand
159
Philippines
76
India
648
Brazil
290
Page 33
Japan
444
Indonesia
91
..and a ‘industry’ experienced local auto finance
execution team
Global Automotive Finance Leader
India Financial Services Advisory leader
Jens Diehlmann
Partner
Rohan Sachdev
Partner
►
18 years of automotive finance experience
►
Co-author of the Book “Automotive
Management” which comprises the full
automotive value-chain under the focus of
financial aspects
►
Leader, Financial Services – Performance
Improvement practice in India
►
15 years of experience in assisting large
international and domestic BFSI entities in
strategic and operational transformation
India Leader – Automotive Sector
Rakesh Batra
Partner
►
Account partner for large auto OEMs
globally and in India
►
Leadership experience in assisting large
automotive and eco-system players in
strategic and operational improvement
Auto Finance Team
Bhavin Sejpal
Manager
Page 34
Partner – financial services and auto finance expert
NBFC leader and auto finance expert
Himanshu Bansal
Director
►
Over 14 years of Banking & Consulting
experience in Strategy, customer solutions
and retail lending
►
Extensive leadership experience consulting
auto finance companies and captives in
market entry
Auto Finance Team
Trupti Bagwe
Manager
Fali Hodiwalla
Partner
►
15 years of experience with advising
banking and financial services clients
►
Extensive leadership experience in defining
entry strategy and setting up captive auto
finance entities in India
Auto Finance Team
Vivek Sapre
Manager
►
BFSI experience of over 5 years with focus
on retail and wholesale finance segment
►
BFSI experience of over 5 years with focus
on non-banking finance space
►
BFSI experience of over 5 years with
industry experience in auto finance
►
Recently assisted a large OEM in feasibility
study for a captive finance company set-up
►
Extensive experience in auto finance
market entry, strategy and operational
improvements
►
Assisted large vehicle finance companies in
operational transformation and new
company set-up
Auto financing market in India – Point of view
EY Offices
Ahmedabad
2nd floor, Shivalik Ishaan
Near. C.N Vidhyalaya,
Ambawadi,
Ahmedabad - 380 015
Tel: + 91 79 6608 3800
Fax: + 91 79 6608 3900
Bengaluru
12th & 13th floor ,
“U B City” Canberra Block,
No.24, Vittal Mallya Road
Bengaluru - 560 001
Tel: + 91 80 4027 5000
+ 91 80 6727 5000
Fax: + 91 80 2210 6000
+ 91 80 2224 0695
Chennai
Tidel Park, 6th & 7th Floor
A Block (Module 601,701-702)
No.4, Rajiv Gandhi Salai,
Taramani
Chennai - 600 113
Tel: + 91 44 6654 8100
Fax: + 91 44 2254 0120
Hyderabad
Oval Office 18, iLabs Centre,
Hitech City, Madhapur,
Hyderabad - 500 081
Tel: + 91 40 6736 2000
Fax: + 91 40 6736 2200
Prestige Emerald, No. 4,
1st Floor, Madras Bank Road,
Lavelle Road Junction,
Bangalore - 560001
Kochi
9th Floor “ABAD Nucleus”
NH-49, Maradu PO,
Kochi – 682 304
Tel: + 91 484 304 4000
Fax: + 91 484 270 5393
Chandigarh
1st Floor, SCO: 166-167
Sector 9-C, Madhya Marg
Chandigarh - 160 009
Tel: + 91 172 671 7800
Fax: + 91 172 671 7888
Kolkata
22, Camac Street
3rd Floor, Block C”
Kolkata – 700 016
Tel: + 91 33 6615 3400
Fax: + 91 33 2281 7750
Page 35
Mumbai
14th Floor, The Ruby
29 Senapati Bapat Marg
Dadar (west)
Mumbai - 400 028
Tel :+ 91 22 6192 0000
Fax : + 91 22 6192 1000
5th Floor Block B-2,
Nirlon Knowledge Park
Off. Western Express Highway
Goregaon (E)
Mumbai - 400 063
Tel: + 91 22 6192 0002
Fax: + 91 22 6192 3000
NCR
Golf View Corporate
Tower - B
Near DLF Golf Course,
Sector 42
Gurgaon – 122 002
Tel: + 91 124 464 4000
Fax: + 91 124 464 4050
3rd & 6th Floor, Worldmark-1
IGI Airport Hospitality District
Aerocity New Delhi-110037, India
Tel: +91 11 6671 8000
Fax +91 11 6671 9999
Auto financing market in India – Point of view
4th & 5th Floor, Plot No 2B,
Tower 2, Sector 126,
Noida - 201 304
Gautam Budh Nagar, U.P. India
Tel: + 91 120 671 7000
Fax: + 91 120 671 7171
Pune
C-401, 4th floor
Panchshil Tech Park
Yerwada (Near Don Bosco School)
Pune – 411 006
Tel: + 91 20 6603 6000
Fax: + 91 20 6601 5900
For further insights, please
contact:
Fali Hodiwalla
Partner
Performance Improvement - Financial Services
Email: [email protected]
Phone: +91 98201 39302
Himanshu Bansal
Director
Financial Services – NBFC sector
Email: [email protected]
Phone: +91 97698 43789
Ernst & Young LLP
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