Improving macroeconomic environment coupled with higher government focus on infrastructure and rural areas will help non-banking finance companies (NBFCs) grow their vehicle loans at a faster clip over the three fiscals to 2020, according to credit rating agency Crisil.
The agency assessed that NBFCs will be clocking a compounded annual growth rate (CAGR) of 15 per cent growth in vehicle loans over the three fiscals compared with 12 per cent seen in the past three fiscals.
“The market opportunity for NBFCs will stem from continued government investments in the roads sector, expected finalisation of the scrapage policy or the Voluntary Vehicle Modernisation Programme and higher Budgetary spends for the rural sector,” Crisil said.
The agency also underscored that NBFCs will face structural challenges such as the overhang of the Goods and Services Tax (GST) implementation, impact of the dedicated freight corridors coming up in the west and east and the cost of transition to BS VI engines, which will have to be managed.
Additionally, intensifying competition from private sector banks aggressively chasing retail assets and public sector banks clawing back into contention after recapitalisation are other realities.
Financing segments
In terms of segments, around 85 per cent of NBFC vehicle finance portfolio comprises commercial vehicle and cars/utility vehicles financing. The balance includes tractor and two- and three-wheeler financing.
While all segments of vehicle finance are expected to grow faster than before, Crisil said commercial vehicle financing, which constitutes 51 per cent of the vehicle finance portfolio of NBFCs, is expected to rebound from the lows seen over the past several years.
CV financing is expected to clock a CAGR of 14 per cent till 2020, on account of which NBFCs would retain their share of over 65 per cent in the overall CV finance market.
In a statement, the agency observed that light commercial vehicle (LCV) finance will steer this growth as the hub-and-spoke logistics model gains traction after the advent of GST, but the shift to higher tonnage vehicles will also prop up medium and heavy commercial vehicle (M&HCV) financing.
“NBFCs have carved a niche in the small fleet operator and first-time user/buyer segments of CV finance by leveraging on their core strengths of customer relationships, adaptability, local knowledge and innovativeness,” said Krishnan Sitaraman, Senior Director, Crisil Ratings.
While banks will pose a threat in M&HCV lending, LCV financing would continue to be dominated by NBFCs. NBFCs’ LCV financing portfolio will grow at a CAGR of 16 per cent, leading to a commanding 80 per cent market share by 2020, he added.
The agency assessed that other major segment, cars and utility vehicle (UV) financing, which constitutes 34 per cent of overall NBFC vehicle finance portfolio, is expected to clock a CAGR of 18 per cent over the next three fiscals.
Increasing disposable incomes, sharper focus on Tier II/III cities, growing consumer preference for higher-value UVs, and improving penetration of formal finance are expected to propel growth.
Banks, according to the Crisil statement, continue to dominate the cars and UV financing segment with a share of 63 per cent, having gained 300 basis points market share from NBFCs over the past four fiscals, due to their ability to offer lower yields and attract customers in the top 20 cities. One basis point (bp) equals one-hundredth of a percentage point.
Interesting trend
However, within NBFCs, an interesting trend that has emerged in recent years is the significant scale-up in the business of foreign-owned captive NBFCs compared to domestic NBFCs in the cars and UV financing market.
According to Ajit Velonie, Director, Crisil Ratings, “The ability of foreign-owned captive NBFCs to offer attractive yields — backed by de facto subvention from parent — means they can compete with banks. The upshot has been that foreign-owned captives have increased their market share by 500 bps over the past four years in cars and UVs financing market.”
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