Car Loan Business Of Banks Is Surging Up In Top Gear

The car loan business in the recent times is seen to be growing in top gear with the banks seeing an annual increase of 18 to 20%, especially for the banks. Some of the world's biggest markets for passenger vehicles now see an annual domestic sale of more than 3.2 million units helping the auto lending industry to surge up and ahead. The primary reasons to this are:

  • The increase in the volume of car sales, new as well as used, there is a rising preference among the consumers to purchase financed cars and
  • The increase in cost of vehicles.
  • Both these together are helping the banks to see an annual increase in their business especially in the auto loans sector by 18 to 20%. This rise is double as compared to the growth in the sales in cars.

    • Some of the major banks that provide car loans in the nation doubled its business to 620 billion within the financial years 13 and 17.
    • With this trend ongoing, the Compounded Annual Growth or CAGR has risen to about 23% on the whole.
    • Some specific banks contribute to more than 18% of the combined CAGR resulting to about250 billion of the total amounts of the CAGR.

    The non-banking financial institutions, credit unions and other lending sources that do their business online such as libertylending and others have also witnessed double-digit CAGR.

    A few more specific data

    To be more specific, the Institutional Equities Research suggests that:

    • The auto lending business especially by the commercial banks of the country have witnessed a growth of about 20% in both financial years 2016 and 2017 and
    • The report also estimates that the total auto loan exposure will be about 2.08 trillion by the end of this year, if not more.

    The retail secured assetsshare is also seeing a significant rise due to the reason that the car buyers are opting for more car loans.

    • The above research in this regard estimates that this will surge by 75 to 80% from its current 65 to 70% mark.
    • The report also additionally suggests that the invoice value of the new cars is also set to rise as the car sales continue to increase at seven to eight per cent yearly.

    This will eventually help in the growth of the auto loan business even further, the experts suggest.

    Momentum from different sources

    Apart from the rise in the invoice value of the cars and the rise in demand for auto loans by the consumers, there is also some momentum given to the auto lending industry from the used car financing. Cars, vans and other utility vehicles, the used car business has so much to offer.

    With millions of units selling, the growing preference by the consumers are seen in different areas as well such as:

    • To own bigger cars
    • To buy more sophisticated cars
    • Favoring sports utility vehicles and others.

    All these have resulted in an increase in the average price of these vehicles

    Considering the 80% Loan to Value ratio, the annual auto lending market is expected to be 1.24 trillion dollars if only 2.6 million cars are financed every year at an average of 0.6 million dollars each.

    That means there are multiple areas from which the auto lending industry can gain momentum from making it a strong and most lucrative business division of the banks.

    Role of the multiple players

    In addition to that, the fact that there are also multiple players in this specific market enables them to woo more buyers. They use different tactics for that such as:

    • Offering more attractive rate of interests
    • 100% financing on ex-showroom price
    • Waiver ofprocessing fee of the loan and much more.

    This is not a difficult task since this market itself is so large that even each of the new entrants can find a distinct niche for itself quite easily. The major and already established banks face a considerable challenge from these new entrants and therefore have to look for other ways to expand their presence. This they can do in different ways such as:

    • By expanding their distribution and networks
    • By introducing new loan products for the consumers and
    • By strengthening their relationship with the manufacturers of the cars.

    The car dealers also play a significant role in automobile lending with their dealer financing policies. In fact, dealer financing is so popular a trend now that about 85% vehicles that are sold in different showroomsare getting financed by the dealers. Ideally, they work in collaboration with several different banks and large and small financing companies to get these loans for their customers.

    Role of the banks

    The commercial banks have now turned quite liberal in their financing policies for both new and old cars. A remarkable change noticed in their lending approach is for the buyers residing in the rural areas and with no income proof. Previously they were given a loan up to 45 to 50% of the ex-showroom value. However, now that has been raised up to 65 to 70%.

    Also, it is seen in the case of many banks that have their branches they have in the tier-II cities are now aiming or being given a target to get more business f5rom car loans to the tune of 200 to 250 million every year.

    Summing it up

    Financing of new cars had been increasing steadily and with the inclusion of used car financing, the figure has touched 80% as compared to its previous 68% in the previous years.

    It has also been noticed that the auto financiers are now offering loans for longer durations in order to make the repayments easier for the consumers. Typically, the loans are now increased by as much as 12 months minimum to the maximum of 3.5 to 4 years.

    This trend is seen over the past few years that hasresulted in slower repayments which eventually has played a significant role in supporting car loan growth to such a significant extent which is expected to reach stupendous levels by the end of 2020.

    Willim Jacob
     

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