India’s changing middle class tastes
whet the appetite for automobile finance
Thought Paper
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India’s changing middle class tastes whet the
appetite for automobile finance
Henry Ford invented the first automobile,
right? Wrong. The first automobile was actually
invented by Sam McLaughlin, a Canadian from
Oshawa, Ontario. He went into partnership
with American David Buick to mass-produce
McLaughlin-Buick vehicles, a year before the
Model ‘T’ arrived. Subsequently, car registration
climbed from 178 in 1903 to just over 2,000 by
1908. Selling cars was a challenge during this
period, until an extraordinary salesman and
entrepreneur, William Durant, entered the
fledgling automobile industry. William ‘Billy’
Durant founded General Motors and was the first
to introduce automobile financing.
Automobile loans were not common in India
until the 1990s, and were restricted to the rich.
Ordinary citizens did not or could not take loans
because they didn’t earn enough or thought
that it was less important to own a car when
compared to other essential needs. They feared
the risk or were more interested in saving for
the future. All that changed with the liberalization
of the Indian economy around 20 years ago.
This paper analyzes the impact of affordable
automobile loans in the middle class consumer
mindset and its long term impact and
implications on the Indian society.
Consumer perception and scenario in the 80s’
The consumer mindset of the 1980s was one of
caution and savings orientation. Government
jobs – low paying, but secure – were preferred.
People couldn’t aspire beyond one house, and
spent their entire working life paying for it.
Owning a vehicle was low priority and the
absence of easy, low cost vehicle finance was a
further dampener.
If one analyzes the balance sheet of the banks
in the early 80s, the percentage of vehicle loans
(individual personal vehicles) in the books of
the bank, when compared to the overall asset
size of the bank was very less. The number of
products under vehicle loan category offered
by banks and the demand for loans from
customers was very less.
Emergence of automobile finance in India
and role of banks
The liberalization of the Indian economy in the
early 90s’ brought in a host of foreign investors
and banks which revolutionized the growth
of industries across the economy. There was
special focus on the automobile industry, which
produced passenger cars and multi-utility
vehicles, since it contributed significantly to the
GDP growth of our country.
Job opportunities in automobile, IT and other
industries increased the wealth and purchasing
02
Thought Paper
power of the middle class manifold; people
who couldn’t afford a single vehicle, were now
buying luxury cars or expensive two -wheelers.
The automobile industry responded to the
robust demand with both high-end and
affordable models, and approached banks and
financial institutions to offer vehicle finance
at competitive rates. Both these measures
accelerated the automobile industry’s growth.
Consumer perception and scenario from
the 1990s’ onwards
The trend started changing in the early 1990s.
There were better job prospects because of the
privatization of the Indian economy and the
disposable income of the middle class was high.
With the availability of a plethora of easy options
and auto loan at reasonable rates of interest,
owning ‘the dream car’ was now a reality for
the average middle class consumer. The above
factors have contributed significantly in
changing the customer mind set from being
‘risk averse’ to being seen as ‘risky investors’, as
they started to purchase houses and cars
through home and car Loans.
Indian banks and financial institutions offered a
variety of automobile loans, as listed below:
Margin Money Scheme: Under this scheme, the
borrower is required to pay margin money of at
least 10% of the total loan amount, along with
one Equated Monthly Installment (EMI). The
balance is paid through post-dated cheques
across the tenure of the loan.
has to pay up to five EMIs in advance and the
balance through post-dated cheques across the
tenure of the loan.
Security Deposit Scheme: Under this scheme,
the borrower is required to make a security
deposit against the loan amount, which is
refunded at the end of the tenure. This is the
most widely used type of loan.
Hire Purchase Scheme: This is an agreement to
let the car on hire, under which the hirer has
the option to purchase the car subject to certain
conditions. Hire purchase is mostly offered by
non-banking Finance Companies.
Lease Financing Purchase: A lease is a hiring
contract between the owner of an asset (the
lessor) and its user (the lessee). The ownership
rests with the lessor, who gives the right of
usage to the lessee for an agreed duration in
return for periodic payments.
Advance Equated Monthly Installment Scheme:
This scheme offers 100% financing. The borrower
Automobile finance growth factors
Research says that 75% of vehicles purchased in
the last decade were financed through loans.
Here are the key drivers of this growth:
•Liberalization of the economy to allow
entry of private sector banks and other
financial institutions
• Availability of credit data, enabling banks to
offer higher ‘loan to value’ and balloon
installment schemes at affordable EMIs. Also,
availability of loan management software
enabling banks to launch market and track
products easily.
• Economic growth, especially in the IT sector,
leading to higher disposable income. Young
professionals buying their first vehicle barely
a year or two into their jobs
• Spread of automobile finance to hitherto
underserved
locations,
as
automobile
manufacturers and distributors set up shop
across the country
• Securitization of automobile loans in the
aftermath of the 2008 financial crisis
• Emergence of direct selling, collection and
recovery agents, supporting banks throughout
Thought Paper
03
the lending life cycle, from origination to
processing to recovery. This also increased
competition and forced banks to enter
untapped rural markets with motorcycle
loans at discounted rates of interest
AUTO FINANCE
(CARS)
Car Industry sales volume (` cr)
Growth
Cash sales (` cr)
Cash sales
Finance penetration (` cr)
Finance penetration
Customer margin (` cr)
Customer margin
Auto finance market (` cr)
Auto finance growth
32%
GROWTH
21.5%
24.3%
11.3%
5-YEAR TREND
New car units sold (Nos.)
•Fund and non-fund bank advances to
automobile companies, spurring expansion
1,363,000
FY07
51,113
21%
12,778
25%
38,334
75%
5,750
15%
32,585
21%
1,517,400
FY08
56,902
11.3%
15,933
28%
40,969
72%
6,145
15%
34,824
6.9%
-1.2%
1,499,300
FY09
56,975
0.1%
19,941
35%
37,034
65%
6,296
17%
30,738
-11.7%
1,863,700
FY10
72,683
27.6%
21,805
30%
50,878
70%
7,632
15%
43,247
40.7%
2,459,500
FY11
98,380
35.4%
27,546
28%
70,834
72%
10,625
15%
60,209
39.2%
Source Kotak Mahindra Prima
Conclusion
The automobile finance offered by banks and
financial institutions at affordable rates of
interest has paved the way for the growth of
the automobile sector in India. Various schemes
and features are available to consumers which
can accommodate their every need, thus
luring them into a financing option. The Indian
automobile sector has come a long way since
the first car was manufactured in Mumbai in
1898. Today, it is one of India’s key industries
and a pillar of the economy, employing over 10
million people directly and indirectly.
The Indian automobile market has claimed global
attention, being the second largest two wheeler
market, fourth largest commercial vehicle market,
and eleventh largest passenger car market in
the world, and poised to become the third
largest automobile market next only to the
United States and China. Industry growth fueled
by the middle class’s appetite for luxury cars
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Thought Paper
has tripled the disbursal of automobile loans in
the last few years.
As Indian society abandons its erstwhile savings
culture for a consumerist, indebted lifestyle,
there is concern about its ability to fund its
retirement years in the absence of a Government
sponsored social security program. This is
already being manifest as a higher retirement
age, extending well into the 60s. The Government
has a big task on hand to introduce proactive
measures to combat potential economic
imbalances arising from these trends.
Against this backdrop, it is natural to ask
whether it is worth the while of a middle class
household to spend half its income repaying
the loan on a luxury car. However, as long as
banks continue to offer attractively priced loans,
consumers will succumb to temptation.
References
1. Maps of india.com
5.thehistoryof.netmotorbeam.com
2.Indiabusiness.nic.in
6. Surf India.Com
3.Livemint.com
7.Business.mapsofindia.com
4.iloveindia.com
Reghunathan Sukumara Pillai
Industry Principal, Finacle, Infosys
Jayanthi K J
Principal Consultant, Finacle, Infosys
Thought Paper
05
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