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.
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.
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
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.
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.
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.
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
• 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
• Securitization of automobile loans in the
aftermath of the 2008 financial crisis
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.
• 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.
• Spread of automobile finance to hitherto
underserved locations, as automobile
manufacturers and distributors set up shop
across the country
• Emergence of direct selling, collection and
recovery agents, supporting banks throughout
Thought Paper 03
 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
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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