A walkthrough on emergence of Automobiles Finance & Loans in India. Read more to know how the industry has adapted with the ever changing trends and significant role of Banks in it.

1. India’s changing middle class tastes
whet the appetite for automobile finance
Thought Paper
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2. India’s changing middle class tastes whet the
appetite for automobile finance
Henry Ford invented the first automobile, Automobile loans were not common in India
right? Wrong. The first automobile was actually until the 1990s, and were restricted to the rich.
invented by Sam McLaughlin, a Canadian from Ordinary citizens did not or could not take loans
Oshawa, Ontario. He went into partnership because they didn’t earn enough or thought
with American David Buick to mass-produce that it was less important to own a car when
McLaughlin-Buick vehicles, a year before the compared to other essential needs. They feared
Model ‘T’ arrived. Subsequently, car registration the risk or were more interested in saving for
climbed from 178 in 1903 to just over 2,000 by the future. All that changed with the liberalization
1908. Selling cars was a challenge during this of the Indian economy around 20 years ago.
period, until an extraordinary salesman and
entrepreneur, William Durant, entered the This paper analyzes the impact of affordable
fledgling automobile industry. William ‘Billy’ automobile loans in the middle class consumer
Durant founded General Motors and was the first mindset and its long term impact and
to introduce automobile financing. implications on the Indian society.
Consumer perception and scenario in the 80s’
The consumer mindset of the 1980s was one of If one analyzes the balance sheet of the banks
caution and savings orientation. Government in the early 80s, the percentage of vehicle loans
jobs – low paying, but secure – were preferred. (individual personal vehicles) in the books of
People couldn’t aspire beyond one house, and the bank, when compared to the overall asset
spent their entire working life paying for it. size of the bank was very less. The number of
Owning a vehicle was low priority and the products under vehicle loan category offered
absence of easy, low cost vehicle finance was a by banks and the demand for loans from
further dampener. customers was very less.
Emergence of automobile finance in India
and role of banks
The liberalization of the Indian economy in the power of the middle class manifold; people
early 90s’ brought in a host of foreign investors who couldn’t afford a single vehicle, were now
and banks which revolutionized the growth buying luxury cars or expensive two -wheelers.
of industries across the economy. There was The automobile industry responded to the
special focus on the automobile industry, which robust demand with both high-end and
produced passenger cars and multi-utility affordable models, and approached banks and
vehicles, since it contributed significantly to the financial institutions to offer vehicle finance
GDP growth of our country. at competitive rates. Both these measures
accelerated the automobile industry’s growth.
Job opportunities in automobile, IT and other
industries increased the wealth and purchasing
02 Thought Paper

3. Consumer perception and scenario from
the 1990s’ onwards
The trend started changing in the early 1990s. has to pay up to five EMIs in advance and the
There were better job prospects because of the balance through post-dated cheques across the
privatization of the Indian economy and the tenure of the loan.
disposable income of the middle class was high.
Security Deposit Scheme: Under this scheme,
With the availability of a plethora of easy options
the borrower is required to make a security
and auto loan at reasonable rates of interest,
deposit against the loan amount, which is
owning ‘the dream car’ was now a reality for
refunded at the end of the tenure. This is the
the average middle class consumer. The above
most widely used type of loan.
factors have contributed significantly in
changing the customer mind set from being Hire Purchase Scheme: This is an agreement to
‘risk averse’ to being seen as ‘risky investors’, as let the car on hire, under which the hirer has
they started to purchase houses and cars the option to purchase the car subject to certain
through home and car Loans. conditions. Hire purchase is mostly offered by
non-banking Finance Companies.
Indian banks and financial institutions offered a
variety of automobile loans, as listed below: Lease Financing Purchase: A lease is a hiring
contract between the owner of an asset (the
Margin Money Scheme: Under this scheme, the
lessor) and its user (the lessee). The ownership
borrower is required to pay margin money of at
rests with the lessor, who gives the right of
least 10% of the total loan amount, along with
usage to the lessee for an agreed duration in
one Equated Monthly Installment (EMI). The
return for periodic payments.
balance is paid through post-dated cheques
across the tenure of the loan.
Advance Equated Monthly Installment Scheme:
This scheme offers 100% financing. The borrower
Automobile finance growth factors
Research says that 75% of vehicles purchased in • Availability of credit data, enabling banks to
the last decade were financed through loans. offer higher ‘loan to value’ and balloon
Here are the key drivers of this growth: installment schemes at affordable EMIs. Also,
availability of loan management software
• Liberalization of the economy to allow
enabling banks to launch market and track
entry of private sector banks and other
products easily.
financial institutions
• Economic growth, especially in the IT sector, • Spread of automobile finance to hitherto
leading to higher disposable income. Young underserved locations, as automobile
professionals buying their first vehicle barely manufacturers and distributors set up shop
a year or two into their jobs across the country
• Securitization of automobile loans in the • Emergence of direct selling, collection and
aftermath of the 2008 financial crisis recovery agents, supporting banks throughout
Thought Paper 03

4. the lending life cycle, from origination to • Fund and non-fund bank advances to
processing to recovery. This also increased automobile companies, spurring expansion
competition and forced banks to enter
untapped rural markets with motorcycle
loans at discounted rates of interest
32%
AUTO FINANCE GROWTH
24.3%
21.5%
(CARS)
11.3%
5-YEAR TREND -1.2%
New car units sold (Nos.) 1,363,000 1,517,400 1,499,300 1,863,700 2,459,500
FY07 FY08 FY09 FY10 FY11
Car Industry sales volume (` cr) 51,113 56,902 56,975 72,683 98,380
Growth 21% 11.3% 0.1% 27.6% 35.4%
Cash sales (` cr) 12,778 15,933 19,941 21,805 27,546
Cash sales 25% 28% 35% 30% 28%
Finance penetration (` cr) 38,334 40,969 37,034 50,878 70,834
Finance penetration 75% 72% 65% 70% 72%
Customer margin (` cr) 5,750 6,145 6,296 7,632 10,625
Customer margin 15% 15% 17% 15% 15%
Auto finance market (` cr) 32,585 34,824 30,738 43,247 60,209
Auto finance growth 21% 6.9% -11.7% 40.7% 39.2%
Source Kotak Mahindra Prima
Conclusion
The automobile finance offered by banks and has tripled the disbursal of automobile loans in
financial institutions at affordable rates of the last few years.
interest has paved the way for the growth of
As Indian society abandons its erstwhile savings
the automobile sector in India. Various schemes
culture for a consumerist, indebted lifestyle,
and features are available to consumers which
there is concern about its ability to fund its
can accommodate their every need, thus
retirement years in the absence of a Government
luring them into a financing option. The Indian
sponsored social security program. This is
automobile sector has come a long way since
already being manifest as a higher retirement
the first car was manufactured in Mumbai in
age, extending well into the 60s. The Government
1898. Today, it is one of India’s key industries
has a big task on hand to introduce proactive
and a pillar of the economy, employing over 10
measures to combat potential economic
million people directly and indirectly.
imbalances arising from these trends.
The Indian automobile market has claimed global
Against this backdrop, it is natural to ask
attention, being the second largest two wheeler
whether it is worth the while of a middle class
market, fourth largest commercial vehicle market,
household to spend half its income repaying
and eleventh largest passenger car market in
the loan on a luxury car. However, as long as
the world, and poised to become the third
banks continue to offer attractively priced loans,
largest automobile market next only to the
consumers will succumb to temptation.
United States and China. Industry growth fueled
by the middle class’s appetite for luxury cars
04 Thought Paper

5. 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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