By Namit Jain
Imagine stepping into a used car dealership with Rs 30,000 disposable savings in your bank account and walking away with a 2015 Swift VDi of your choice on a loan the same day. Is it possible to buy a used car on finance? How much loan would you get? Would you be able to compare loan options? How fast would money hit the bank account? Will it be an easy experience? These questions are likely to emerge in your mind while buying a used car on finance today.
Used car, in fact, is the least penetrated auto finance category in India as on date. Of 10 new cars sold today, 7 are sold on finance while it is only 2 in case of used cars. This is in sharp contrast to a developed market like US where nearly 55% used cars are sold on finance. Loan discovery and application for used cars is a complicated and time- consuming process in India. It takes more than 10 days on average to get a loan disbursed, resulting in higher working capital cost for a used car dealer and poor purchase experience for consumers. Fast forward to 2021, used car finance is expected to emerge as one of the largest retail finance segments with $10 billion worth of annual retail loan volumes. What’s going to drive this change? Let’s discuss 5 mega trends that will cause a larger disruption in this sector than many observers assume today.
1. Supply creates demand: Used car is the classic example of an industry where supply creates demand. With burgeoning car park backed by a rapid growth in new car sales and downward reduction in average car ownership tenor to 5 years, India is likely to witness a supply of 10 million quality used cars by 2021. As the underlying market grows, retail finance on used cars is conveniently poised for natural growth in itself.
2. The more making it merrier: Several banks and non-banking financiers have entered the used car segment in recent months, including leading two-wheeler financiers (Capital First & Hero FinCorp), large banks (Yes Bank) and new-born NBFCs (Clix Capital). These new players are likely to bring innovation in loan products, better risk coverage across consumer segments and process efficiency contributing to increased finance depth in used cars.
3. Marching to a different beat: The litmus test of an underwriting model isn’t the portfolio quality alone, but three more things – speed, breadth and simplicity. Not at the cost of each other. In many ways, used car is a unique consumer finance segment. Compared to bike or consumer durable (CD), similarity exists in terms of reasonable share of first time credit seeker profiles, but exposure level is 8 to 10 times more on used car (average used car loan is Rs 300,000 while CD is Rs 30,000). Compared to business loan (BL), similarity exists in terms of higher mix of self-employed profiles, but existing credit lines of used car applicants are 70 percent less than that of a typical BL seeker. While extension of the existing Bike or PL decisioning engines has been a starting point, lenders need to introduce richer underwriting models unique to the consumer character of this segment.
4. Going ‘digital’ in far more comprehensive way: Even the best of auto finance experience today can only be termed as ‘semi’ digital. The industry has certainly evolved in the last 2 years in terms of its digital channel strategy. From ‘online lead gen’ to ‘online to offline fulfilment’ approach, from instant ‘loan offers’ to instant ‘soft approvals’. What banks need next is an integrated digital strategy. Banks need to reimagine the consumer journey from pre-login to login, to decisioning, to disbursal and post disbursal as an end-to-end digital journey with least possible breaks or physical interjections. India Stack is an essential enabler, but not a sufficient lever. Digital auto players with strong distribution, fintech and vertical segment expertise will make the next level disruption happen in this space.
5. Going smart about ‘systemic’ challenges: There are two unique challenges in the used car finance segment – Asset Valuation Risk and Asset Title Risk. Since each used car is unique, banks need to assess its quality and its market valuation to decide the loan value. Secondly, since a used car sale involves change of title ownership, until the car’s Registration Certificate is endorsed to the new buyer and hypothecated to the lender, the lender has no secured asset for recourse. In our country, this process takes an average of 45 days, in some cases going beyond 180 days as well and also runs the risk of fraud. Banks need to go smarter about de-risking on these systemic challenges and finding a workaround for these time-consuming complications. Reduced dependence on local unorganized agents and adoption of centralized asset inspection or Title Risk management capabilities of auto fintech players are likely to be the way forward.
While used car finance segment is poised for natural growth as the underlying market itself grows, it would take significant fundamental changes across the ecosystem to get to the growth of $10 bn by 2021. With innovations in decisioning engines, loan products, distribution channels, workflow automation and risk management, ‘same day’ used car loans will not be as distant a possibility as it sounded at the start of our imaginative journey.
(The author heads the Used Car Finance business vertical at CarDekho.com. Views are personal)