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22 February, 2018 00:54 IST
NBFC vehicle loans to grow 300 bps faster over the next 3 fiscals: Crisil
Source: IRIS | 12 Feb, 2018, 01.05PM
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CRISIL expects vehicle finance portfolio of non-banking finance companies (NBFCs) to grow 300 basis points (bps) faster over the three fiscals to 2020, clocking a compound annual growth rate (CAGR) of 15% compared with 12% seen in the past three fiscals.

Growth would be driven by improving macroeconomic environment coupled with higher Government focus on infrastructure and rural areas. The market opportunity for NBFCs will stem from continued government investments in the roads sector, expected finalisation of the scrappage policy or the Voluntary Vehicle Modernisation Programme and higher Budgetary spends for the rural sector.

But NBFCs will also face structural challenges such as the overhang of the Goods & Services Tax (GST) implementation, impact of the dedicated freight corridors coming up in the west and east, and the cost of transition to BS VI engines, which will have to be managed. Additionally, intensifying competition from private sector banks aggressively chasing retail assets and public sector banks clawing back into contention after recapitalisation is a reality.

In terms of segments, around 85% of NBFC vehicle finance portfolio comprises commercial vehicle and cars / utility vehicles (UVs) financing. The balance includes tractor and 2/3 wheeler financing. While all segments of vehicle finance are expected to grow faster than before, commercial vehicle financing, which constitutes 51% of the vehicle finance portfolio of NBFCs, is expected to rebound from the lows seen over the past several years and is expected to clock a CAGR of 14% till 2020, on account of which NBFCs would retain their share of over 65% in the overall CV finance market.

Light commercial vehicle (LCV) finance will steer this growth as the hub and spoke logistics model gains traction after the advent of GST, but the shift to higher tonnage vehicles will also prop medium and heavy commercial vehicle (M&HCV) financing.

''NBFCs have carved a niche in the small fleet operator and first-time user/buyer segments of CV finance by leveraging on their core strengths of customer relationships, adaptability, local knowledge and innovativeness,'' said Krishnan Sitaraman, Senior Director, CRISIL Ratings. ''While banks will pose a threat in M&HCV lending, LCV financing would continue to be dominated by NBFCs. NBFCs' LCV financing portfolio will grow at a CAGR of 16%, leading to a commanding 80% market share by 2020.''

The other major segment, cars and UV financing, which constitutes 34% of overall NBFC vehicle finance portfolio, is expected to clock a CAGR of 18% over the next 3 fiscals. Increasing  disposable incomes, sharper focus on Tier II and Tier III cities, growing consumer preference for higher-value UVs, and improving penetration of formal finance are expected to propel growth.

Banks continue to dominate this segment with a share of 63%, having gained 300 bps market share from NBFCs over the past four fiscals, due to their ability to offer lower yields and attract customers in the top 20 cities. However, within NBFCs, an interesting trend that has emerged in recent years is the significant scale-up in business of foreign-owned captive NBFCs as compared to domestic NBFCs in the cars and UV financing market.

Ajit Velonie, Director, CRISIL Ratings, ''The ability of foreign-owned captive NBFCs to offer attractive yields-backed by de facto subvention from parent-means they can compete with banks. The upshot has been that foreign-owned captives have increased their market share by 500 bps over the past 4 years in cars and UVs financing market.''

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