Banks are focusing on increasing their market share in the used-vehicle category in a bid to increase margins. They are leveraging their access to low-cost funds and large branch networks to make inroads in both the used-car and used-commercial vehicle categories where NBFCs have enjoyed the lion’s share.Axis Bank, HDFC Bank, ICICI Bank and YES Bank have partnered with platforms like Rupyy to disburse used-vehicle loans.“…as we progress, we will keep increasing our footprint in the used-vehicle segment due to better rate of interest,” Anil Bhavnani, senior executive vice president, HDFC Bank, said in a recent webinar.
Data from CareEdge Ratings indicate that banks have around 40% market share in the used commercial vehicle segment while the remaining is held by NBFCs and captive financiers. However, experts estimate that the market share of banks in the segment is lower. Overall, banks hold nearly 56.5% market share in the vehicle loan segment while NBFCs have a 43.5% share.While banks have predominantly focused on financing new vehicles, the rising demand for pre-owned vehicles has made them concentrate more into this segment.
Historically, concerns surrounding asset valuation and title transfers have hindered investment in the used-vehicle segment. However, the pre-owned vehicles market has matured and organised players like certified pre-owned car dealerships and online platforms have emerged. Even original equipment manufacturers have ventured into having pre-owned car dealerships, selling certified pre-owned vehicles of all brands, say experts.
With the surge in demand, banks have pounced on the opportunity to garner higher yields at a time when they have been grappling with high cost of funds. Also, the loan-to-value ratio of a used vehicle tends to be lower than a new vehicle, which can help them manage credit losses better, say experts.“For the bank, financing pre-owned vehicle purchase is an opportunity to generate better yield when compared to new vehicle loans, which is to offset the higher risk associated with pre-owned vehicles,” Chitrabhanu KG, senior vice president and country head – retail assets and cards, Federal Bank, said. Tailored loan schemes and sourcing models are available to suit the requirement of pre-owned vehicle financing, he said.
From a customer standpoint, banks offer better interest rates than NBFCs owing to their access to low-cost deposits. Also, banks have a larger branch network and robust system infrastructure, which not only eases the onboarding process, but also provides for a wider range of products beyond vehicle financing.As far as a bank is concerned, the interest rate differential for loans for a new commercial vehicle and a used one is around 250-300 bps. The same for a new car and used car loans can go up to 550 bps.“Banks have a deeper understanding of their customers given the whole view of the transaction history, which enables them to underwrite these requirements better and price the same competitively vis-a-vis NBFCs,” said Vivek Iyer, partner, Grant Thornton Bharat.
Leveraging data science for enriched underwriting and comprehensive credit coverage empowers banks to make informed lending decisions, bolstering their competitive stance in the market, said Namit Jain, co-founder and chief executive officer, Rupyy.Nevertheless, experts feel the ability of banks to make significant market share gains in the used-vehicle segment will depend on their ability to source business. For starters, they require a robust network of dealers and deal originators. “It will be a bit challenging for banks to outdo NBFCs in used-vehicle finance. But, there will always be entities that are focused enough to do well,” Karthik Srinivasan, senior vice president, group head – financial sector ratings, Icra, said.