10 commandments of Captive auto financing in India
February 2016
The Indian auto and auto finance industry is steadily moving toward recovery 1
Improving socioeconomic environment
► ►
2
Turnaround in auto industry
► ► ►
3
4
5
PV Finance largest and expected to grow
► ►
PV finance market is evolving
►
Used car financing is also growing
►
►
►
Current Account Deficit declined from a peak of 6.7% of GDP (in 3Q, 2012–13) to an estimated 1% in 2014–15, 26% growth in FDI in 2015 10% growth in disposable incomes, 2/3rd of Indian population in working age
GDP growth projections FY16 7.5%
The Indian automotive industry is moving on its path of recovery, and is expected to gain further impetus in the medium term, mainly driven by: Economic growth Reduced fuel prices Government’s focus on road development
Expected 5 year CAGR: ~12%
PV finance forms the largest segment of auto financing Industry at ~INR 761 Bn (~60% share). PV finance penetration set to grow again buoyed by underlying asset sales, new customer segments and entry of new players in the market.
Expected 5 year CAGR: ~17%
Entry of fleet operators has created a new customer segment; rural market continues to grow; financiers have to innovate faster to tackle competition Ubiquitous nature of internet usage has made customers more knowledgeable, demanding of hassle free service and bundled products and services
Ability to innovate has become critical
The used car market is currently 1.2X of the new car market, with organised share of used car financing at 14% only The average age of used cars is 4 years and reducing product lifecycle will ensure further penetration
Expected CAGR 14%%
*Source: SIAM, RBI Data, EY Analysis
Page 2
Auto financing market in India – Point of view
Captives are emerging as a key driver of growth and innovation in the Industry ►
6 Emergence of captives 7 Credit risk is being managed well
8
Profitability needs to be watched closely
9
► ►
► ► ► ►
► ► ►
►
Commandments for success
► ► ► ► ► ►
► ► ►
Most foreign OEMs have set-up captive financing companies in India to improve finance penetration and encourage sales Captives are allowing OEMs to re-engage with customers post car sale Captives support dealers by offering suitable financial support and encourage finance penetration through wholesale-retail linkages Increased coverage of target customer segments through credit bureaus Use of credit scoring models and appropriate pricing of risk by market leaders Multi-layer verification process by leveraging outsourced agencies Evolving digitally enabled collections techniques
Being a low margin product, ROAs on this business have typically not been high Funding cost is a key driver, multiple instruments are available today to drive these down Yields are being managed through a balanced portfolio mix of high yield segments, used car financing, and cross-selling
Move away from generic products to targeted customer propositions Be nimble, target the rapidly emerging customer segments Fulfil ownership and mobility needs through lending and leasing propositions Enhance brand value, reduce product lifecycle, and improve dealer profitability and yields through used car financing Leverage asset tested customer base to grow beyond single product exposure Deploy advanced credit assessment measures to price the risk appropriately Limit credit losses through a robust collections framework Create best in class customer experience by enabling faster approvals Keep funding costs under control through appropriate mix and parental support Maintain ROA above 2% by deploying these principles
*Source: SIAM, RBI Data, EY Analysis
Page 3
Auto financing market in India – Point of view
~11-13% share of captives in auto finance market
NPAs of 0.5-0.6% in the industry
ROA 1.5-2.25% for market leaders
360 degree approach to business
Table of contents 1.
The automotive environment
2.
The auto finance market
3.
10 commandments
4.
About EY
The automotive environment
Driven by stable economic growth, increase in consumption pattern and proportion of working age group.. Improving household consumption patterns over next10 years India’s GDP per capita expected to exceed US$2,000 by 2017
3% 12%
2103
6% 22%
1430
47%
48%
1508
29%
21% 2011
2010
45%
50%
1627 1496
2011
2012
2013
2014F
20%
34%
37%
1808 1522
12%
2015F
2017E
Source: IMF
5% 2020
2015
2025
Real–rich (INR360,000 and above)
Upper–class (INR240,000 to INR360,000)
Prospering (INR120,000 to INR240,000)
Evolving (INR60,000 to INR120,000)
Emerging (INR30,000 to INR60,000)
Surviving (Below INR30,000)
Source: Kotak Institutional Equities Research
Increase in working population age group
India’s favorable demographics (age groups)
Female (millions)
2% 10%
1% 4%
7.5 14.8 25.8
4.8
47.9
17.1
52.5
23.6 27.6
56.3
31.7
58.1
36.3
58.5 58.1 57.1
2010
2050 15-64
65-79
Source: United Nations, Department of Economic and Social Affairs
9.5 12.6
54.9
0-14
6.1
32.7 41.0
68%
80+
40.8 46.4
51.1 55.9 55.3 54.6 57.7 53.1 58.6 51.4 59.4 49.8 61.6
1.2 3.1
23.3
65%
0.1 0.0 0.7 0.1 2.8 0.4
95… 85… 80+ 70… 60… 50… 40… 30… 20… 10… 0-4
0.1 0.0 0.4 0.1 1.8 0.3 1.0
Male (millions) 5.1
2.5
11.0
2050
18.4 28.8
8.3
38.6
11.8
47.5
17.0
54.2
24.6
57.8
29.2
60.0
33.8
62.3
38.9
63.0
43.9
62.8
50.0 55.4
61.8
60.6 60.2 59.2 63.2 57.5 64.0 55.7 64.8 53.9 66.9
Source: United Nations, Department of Economic and Social Affairs, accessed 7 June 2013
Source: United Nations, Department of Economic and Social Affairs, accessed 7 June 2013 Rise in middle class and working population to fuel the growth of auto finance
Page 6
2011
19.0
Auto financing market in India – Point of view
...and emergence of new fast growing and high OEM focus segments such as mini, compact and UV.. FY15: PV Industry segment mix Vans, 6%
FY20E: PV Industry segment mix
Micro, 1% Mini, 20%
Vans, 8%
Micro, 1% Mini, 15%
UV, 21% UV, 29% Compact, 32%
Premium, 0.2%Luxury, 1% Executive, 1% Mid Size, 7% Super Compact, 2%
Premium, 0.2%
Compact, 41%
Luxury, 2% Executive, 1% Mid Size, 9%
Super Compact, 4%
Micro
Mini
Compact
Super Compact
Mid size
Executive
Premium
Luxury
Price Range (INR)
Below 250K
250 – 450K
450 – 800K
600 – 800K
750K – 1.2Mn
1.3 – 1.85Mn
1.85 – 3Mn
Above 3Mn
Body Style
Hatchback
Hatchback
CAGR (FY16EFY20E)
17%
6%
Sedan/Estate/Hat Sedan/Esta ch/Notchback te/Notch
Sedan/ Estate/ Hatch/ Notchback 7%
29%
17%
17%
49%
13.5%
Level of competition
Top OEMs
Tata
Maruti, Hyundai, Chevrolet
Maruti, Hyundai, Tata
Toyota, Maruti, Mahindra
Honda, Maruti, Hyundai
Toyota, Hyundai, Fiat
Skoda, Toyota, Hyundai
Source: SIAM,, EY Analysis Segment mix is by number of units
Page 7
Audi, Mercedes, BMW High
Auto financing market in India – Point of view
UV
Van
UV 1,2,3 Up to 1Mn 600K – 1.5Mn Utility (SUV/ MPV)
Box
19%
17%
UV 1,2,4 – UV3
V1 V2
Mahindra, Maruti, Ford. Hyundai, VW
Maruti, Tata, Mahindra
Moderate
Low
..the automotive sector in India is expected to rebound PV market is expected to grow at a CAGR of ~12% over next 5 years
-6.1%
3.9%
2.6
2.7
2.5
2.6
FY12 Actual
FY13 Actual
FY14 Actual
FY15 Actual Total PVs
FY16
FY17
FY18
4.1
FY19
12.9%
4.6
FY20
PV Y-o-Y Growth
►
India is expected to witness high growth in PV over 2016-20 period as the economic environment improves amid a strong reform push by the new government
►
From the current year of 2015, the CAGR for the industry is forecasted at around 12%, taking the overall PV volume close to 5 million units annually
►
This growth is forecasted on the back of a assumption of positive GDP growth of around 7% (CAGR) and numerous new launches, country specific models, along with high technology adoption
Source/s: SIAM, LMC Automotive , BMI Automotive, EY analysis
Page 8
3.6
3.2
2.9
12.5%
Y-o-Y Growth
Sales in Million
2.3%
12.1%
11.8%
11.4%
Auto financing market in India – Point of view
►
India is expected to witness high growth (10.7%) in PV density over 2012-18 period as compared to 2.6% for the world and 4.0% and 4.4% in Brazil and Russia, respectively.
►
India PV parc is expected to exceed that of Brazil by 2018, while mature markets like Western Europe and Japan are expected to witness stagnation in PV population.
The auto finance market
The Indian auto financing market has gone through several peaks and troughs over the last 17 years… 1998 ~2006 ►
Business circumstance
Strong auto sales growth (~20%) and liquidity in economy attracts banks
► ►
►
Financier needs
Aggressive to capture auto financing market share
►
No specific financing needs
► ►
OEM Financing strategies
2010 ~ 2015
Liquidity crunch, rising defaults force leading financiers to exit the market ~75 bps increase in auto loan interest rates dampens sales growth (~9%)
►
Intense competition leads to reduced interest rates, product innovation
Reluctance to lend to retail segment
►
Focus on building strong OEM relationships Focus on increasing penetration and volumes
►
►
OEM needs
2007~2009
Seek to Increase focus on semiurban/rural areas Focus on relationship with financiers
All OEMs; some OEMs tie up with local market NBFCs to increase rural focus. (For example, Maruti ties up with MMFSL)
► ►
Consolidate/strengthen market position Improve dealer control and profitability
Financier tie-ups
All OEMs
White-label finance
Maruti tied up with Citicorp Financial to form Citicorp Maruti Finance Ltd. (CMFL)
Indian captives
Mahindra & Mahindra and Tata Motors
Mahindra & Mahindra and Tata Motors
Mahindra & Mahindra and Tata Motors
Foreign captives
Limited presence; GMAC, Ford’s JV with Kotak
Existing players exit; no new entrants
VW (VW, Audi, Skoda, Porsche), BMW Daimler, Toyota, Renault-Nissan, Ford
No white label financiers in market after CMFL experiment failed
Source: EY analysis, market insights
Page 10
Maruti, Hyundai, Honda, GM, Fiat
Auto financing market in India – Point of view
…and is poised for a breakout again, on the back of climbing PV sales Vehicle sales have turned positive and are expected to continue the growth over next 5 years… FY11E
FY12E
FY13E
FY14E
FY15E
CAGR
FY16E
FY17E
FY18E
FY19E
FY20E
CAGR
Volume (Mn)
2.5
2.6
2.7
2.5
2.6
1.0%
2.9
3.2
3.6
4.1
4.6
12.2%
Value (INR Bn)
1,192
1,289
1,392
1,341
1,450
5.0%
1,621
1,828
2,101
2,475
2,832
15.0%
…New PV finance disbursements have turned positive and will continue to grow LTV
~70%
Penetration
~75%
~75%
CAGR: ~6%
~77%
CAGR: ~17%
601
650
711
694
761
868
997
1,169
1,403
1,636
FY11E
FY12E
FY13E
FY14E
FY15E
FY16P
FY17P
FY18P
FY19P
FY20P
The new PV finance is market is attractive for new entrants due to current substantial size, high finance penetration and strong underlying asset sales, which will continue to drive the market growth in the future Source: SIAM, Mahindra Financial Services, EY Analysis, Insights gained from market discussions
Page 11
Auto financing market in India – Point of view
NBFCs and captives have emerged as the growth engines of the auto financing industry.. Changing competition landscape in new PV finance
Outstanding vehicle finance book (INR Bn)
~700
4-6% 10-12%
35-37%
~1,000
~1,700
9-11%
11-13%
14-16%
17-19%
29-31%
22-24%
While multiple financiers exist in the market, top 10 players account for ~80% share of the new PV financing market
Pvt. Bank
The top 3 private sector banks dominate the market due to their wide customer base, competitive rates, customer service and cross-selling supported by aggressive marketing and wholesale financing tie-ups with dealers.
PSU Bank
Except for the largest PSU bank, most of the other banks have lost significant share due to rising NPAs and tight credit environment following the crisis. They compete predominantly using competitive pricing and low service costs.
NBFCs
47-49%
44-46%
45-48%
FY10E
FY12E
FY15E Captives
Captives
NBFCs
Public Sector Banks
Independent NBFCs have increased their market share by expanding to non-metro areas and catering to high risk customers to whom banks are hesitant to lend and flexible processes to accommodate a wide set of customer profiles Captives such as have increased their share by largely catering to rural areas (Indian captives) or offering subvention linked innovative products (foreign captives). They are known for customized loan offerings and bundled products
Private Sector Banks
Source: Company annual reports, India Ratings and Research reports, EY analysis
The new PV financing is highly competitive in nature with private sector banks holding on to market share; NBFCs and captives have been able to garner market share by identifying niches in terms of under-catered regions or innovative products Page 12
Auto financing market in India – Point of view
..and have been particularly successful in “bank ignored” niche segments such as premium and low income… 1 2
S
C
Private and PSU banks ► Low risk: low yield ► Dealer and direct channels important ►
M2
M
2
3
KP
NBFCs and Indian captives ► High risk: high yield model ► DSA and dealer important ►
Foreign captives High-end customer segment ► Dealer is most important ► ►
TM
1 SB HB
3 V
Yield
Risk
IB
Self employed: without income proof Low Income
Segment Profile
Banks Page 13
NBFCs
Self employed: with income proof Middle income
Captives
D B
Salaried: private and government High Income
S: Large South Indian NBFC M: Large rural/semi-urban NBFC C: Large diversified NBFC MM: Rural focused auto finance
Auto financing market in India – Point of view
TM: Large Indian captive V: European captive finance company D: Luxury car finance company B: Luxury car finance company
SB: Large public sector bank IB&HB: Large private sector banks
Emergence of captives
The role of captives is set to evolve from enabling OEM’s sales growth to driving customer lifecycle engagement, dealer profitability, product innovation, and greater credit access to the customer. OEM Objective of Captive
Key stakeholders
Dealer Profitability and Control
Incremental sales
Goal
Offer product, customer segment and geography – specific schemes
Potential to enhance residual/resale value and increase used car sales
Potential to improve dealer relationship and control by providing inventory and other fund requirement
Improved profitability due to incremental sales and increased in-house finance penetration
Potential to improve after sales revenue by offering bundled products
Ability to develop a customer database, use analytics and leverage for re-sell and cross sell
Potential to improve customer relationship by offering “one stop solution” through bundled products
Opportunity to improve customer loyalty
Post-sale
Re-purchase
Ability to independently conduct creative marketing campaigns
Ability to bridge existing credit gaps and increase sales
Pre-sales
Sale Car lifecycle
Page 15
Brand enhancement
Potential to offer differentiated finance schemes with subventions to increase sales in urban areas
Customer Engagement
Dependency on existing financing channels
Improved Group Profitability
Auto financing market in India – Point of view
...hence, most foreign OEMs have adopted the captive route to improve finance penetration European OEMs
0.6%
0.4%
0.4%
1.8% 1.8%
0.3%
Medium
Indian OEM
9%
16%
6%
►
Enhanced dealer relationship management
Indian OEMs with captive financing set ups
2
Indian OEM
45% American OEM Indian OEM
►
Reduced finance penetration due to focus on rural segments
►
Offer a combination of standardized and customized products
American OEM
7%
Japanese OEM
Finance penetration
Financing through tie-ups: Banks and NBFCs
3
1.8%
Korean OEM
100%
Size of bubble represents market share (FY’15) Source: Company annual reports, India Ratings and Research reports, EY analysis
Page 16
Increased usage of differentiated products
3%
3
50%
►
5%
Japanese OEMs
2
Foreign OEMs with captive financing set ups
1
1.7%
European
Low
Financing product differentiation
High
1
OEM categorization
European
Auto financing market in India – Point of view
►
Standardized finance product offerings and cash discounts
►
Very high penetration by market leader
…and drive OEM sales through subvention schemes and differentiated products such as buyback guarantee, balloon Share of alternate products in total financing Auto sales and finance growth
12% 10%
Less than 1% usage of alternate products – combined share would be less than ~5%
11.0%
Alternate products have a high share in overall financing
10.0% 9.0%
8% 6% 4% 2% 0%
3.0% 0.5%
0.1%
0.1%
0.5%
1.0% 0.0%
Indian American Korean Japanese American Indian OEM OEM OEM OEM OEM OEM
No Captive
1.2%
1.5% 0.5%
Indian Japanese European European Japanese European European European European OEM OEM OEM OEM OEM OEM OEM OEM OEM
Indian Captive
Foreign Captive
Implications for Captives
Observations ► ►
Alternate financing products such as leasing, step-up, stepdown payments etc., are preferred by luxury segment customers
Source: insights from previous work done and inputs from market discussions,
Page 17
1.5%
0.5%
► ►
Alternate products enhance overall customer value proposition A captive can attract premium customer segments by adding differentiated products to their finance offering Data analytics can be deployed to understand customerbuying behavior Numbers are approximations based on market discussions
Auto financing market in India – Point of view
Dealer financing, besides addressing the financial needs of the dealer, leverages the wholesale-retail linkage to drive retail penetration.. Address all financial needs of dealers
1
Dealer requirement
Captive support
Sustain business
Working capital
Grow existing business
Inventory funding
Expand
Flexible Inventory Funding Terms Credit free periods
Term Loans
(additional showrooms)
3
2
Retail sales with Wholesale-Retail Linkage
Relaxed payment scheme
Captive + OEM Inventory funding rate
Retail rebate
Retail target achievement
Support in difficult times
Dealer
Page 18
Auto financing market in India – Point of view
►
Offer 30-day, credit-free period for inventory funding for select dealers
►
Flexibility and relaxed norms for re-payment such as staggered payments
►
Relaxation of penal interest charges on a case-to-case basis
►
Support the dealers in downturns to help develop a robust relationship
Captives have also been successful in improving customer engagement across the financing touch points along the auto lifecycle Auto-purchase cycle Pre-sale Enquiry
Sale - Auto purchase
Post sale - Service and maintenance
Replacement
Touch points
Lean period after expiry of free warranty
Additional touch points generated due to Captive financing
Auto-finance cycle Marketing finance schemes
Customer enquiry
Page 19
Application
Customer fills application forms and submits all documents
Loan disbursement
Servicing
Contact center notifies the customer on payment due/ updates address and contact details Dealer notifies the customer about loan disbursement
Collections and recovery
Contact center connects with the customer for collections.
Auto financing market in India – Point of view
Cross-sell/upsell
Cross-sell re-finance/topup/ to select customers
Finance schemes to influence repurchase
Support repurchase with buy-back and used car financing
The 10 commandments
1. Move away from generic products to targetted
“Customer value propositions” Key customer segments
Car segments 1
First time buyers 2
Compact 3
Mid and Compact, SUV
Fleet Taxi segment (Drivers)
SUV
Page 21
• Flexible and affordable finance schemes • Subventions and High LTV schemes • Re-payment flexibility • High LTVs and longer tenure schemes backed by risk-based pricing
Rural segment
• High LTVs and longer tenure schemes backed by risk-based pricing • Schemes designed according to income pattern
Mass urban
• Subventions and products such as bundling and EMI structuring • Ease of loan documentation
4
5 Premium,
A captive’s value proposition
High income group
• Subvention and bundled products; buy back guarantee • Ease and reduced TAT of loan documentation
Auto financing market in India – Point of view
2. Be nimble, target the rapidly emerging customer
segments Segment characteristics
Captive’s segment strategy
Low/middle income; difficult to get bank credit
Providing affordable finance
Customer segments
Fleet/taxi ►
Fleet Taxi segment (Drivers) Avg. share of PV sales is ~10%
Rural
►
►
Low irregular/seasonal income; difficult to get bank credit ►
Rural segment Avg. share of PV sales is ~20%
Page 22
Low/middle income, prefer low immediate cash outflow Usually do not qualify for loans from private banks Target customers for local NBFCs with high interest rates
► ►
►
Low income Irregular/seasonal income Limited reach of banks/usually do not qualify for loans from private banks Target customers for NBFCs with high interest rates
►
►
Focus on providing affordable finance Tie ups with big fleet/ taxi players, for background checks and risk mitigation
Making finance available ►
Focus on availability of finance
Auto financing market in India – Point of view
Captive value proposition
Re-payment flexibility and bundled maintenance contracts ►
►
►
High LTVs and longer tenure schemes with risk-based pricing Schemes designed according to income pattern, such as daily repayment mechanism Bundled discount on extended warranty and annual maintenance
High LTVs and long tenure credit schemes with high interest rates ►
►
High risk: high reward model Schemes designed according to the income pattern for rural customers, with flexibilities on re-payment
3. Fulfil ownership and mobility needs through lending and
leasing propositions # Units Avg. Ticket Size Projected growth (till FY20)
2.6 million
~1.9 million
~21,000
~INR 530,000
~INR 380,000
~INR 1,000,000
~12%
~18%
10-15%
Car Sales
(INR Bn)
PV loan disbursements
Incremental PV leasing
1,374
761
21
PV Market
PV Loan
PV Lease
►
Indian car leasing market in India has a limited presence, largely dominated by India subsidiaries of global leasing companies.
►
Leasing is prevalent in car price segments of more than INR 500,000 in Compact, Mid-size and Luxury
►
While the total cars under leasing are at ~70K, the current leasing penetration of corporate sales is ~10% as compared to ~60% in European markets indicating the potential for future market growth
1
Growing passenger vehicle market with widening product portfolio, increasing sales of luxury cars and geographic penetration
2
Increased disposable income and aspirations leading to increased vehicle replacement trends
3
Increasingly corporates are looking for better expense management; impending arrival of GST regulations
4
Increasing leasing product offering by existing leasing companies. Furthermore new trends such as entry of OLA cabs into leasing business to grow radio taxi business
►
Captives are looking at leasing proposition to drive sales of higher brand vehicles
►
Large Indian OEMs are promoting leasing through internal divisions
Source: SIAM, EY analysis
Page 23
Key drivers for auto leasing in India
Car leasing market in India has a limited share of the market (FY15)
Auto financing market in India – Point of view
4. Enhance brand value, reduce product lifecycle, and improve
dealer profitability and yields through used car financing Captive’s used car proposition
Used car exchange program/ buy-back schemes
1 Buy-back schemes will enhance and safeguard residual value of the cars
2
3
Buy-back schemes/used car financing will allow a ready supply of good quality/certified cars for resale
Leverage reduced product life cycle of three years and up-sell next segment car to existing customer
Offer buy-back guarantee before the end of the product life cycle to achieve higher residual value
0
1
2
3
Upsell the next product with attractive finance schemes
Captive
OEM
Used car Financing
2a 1
Buy back guarantee Used car sale
New Car sales Used Car
New Car
2b Customer information database
Leverage the customer database to upsell the next product
4
No of Years
Page 24
~40% of Customers change the cars within 4 – 6 years, followed by ~30% which do in 2-4 years
Auto financing market in India – Point of view
2-4 years
Repurchase cycle reducing to three years
~40% of the used car buyers are below 30 years of age
5. Leverage asset tested customer base to grow beyond
single product exposure Phased approach of retail products
Used car financing
Breakout phase
High Tenor High LTV
Expansion phase Flexible EMI/ step up
Bullet/ balloon/ step up
Setup phase
Yield/risk Car Leasing
Captives can improve yields by offering product variants such as used car, high tenor, high LTV, balloon etc products. Once stable, they can even leverage asset tested customer base to offer semi-unsecured and unsecured products based upon repayment track, at higher yields.
Page 25
Exchange/ buyback Bundled products
Extended topup/ refinance
Strategic segments
Auto financing market in India – Point of view
New vanilla car financing/ subventions
Volume segments
6. Deploy advanced credit assessment measures to price the
risk appropriately Leading practices
Some large Indian captive finance companies have deployed a risk based pricing models, which provide interest rate and LTV based on customer risk profile and asset quality of the geographic location of the customer
Scoring oring parameters meters
Scoring decision
Process decision
Typical profile ►
Profile e related
►
Score Band 1
Fast track approval
Standa Standard ard r approval ap pp prrov ova val al
►
Score Band 2
Income e related
Credit it track record cord
Micro-market -market based ased
Page 26
►
►
S Sc Scor cor ore re Band Ba and nd 3 Score
Referral Ref ferral approval
►
►
Score Band 4
Rejected
►
Weight
Underwriting decision
10%–20%* customers Premium profile customers can jump the queue and provided fast track approvals
15%– 25% 25 2 5%
40%–50 40%–50%* 50% 50%* 50 %** ccustomers usssto u ome mers rs Regular Re R egula ar approval appr appr ap pro ov val al pro process rro ocess hours) (2-24 (2 2 h ours)
35%– 45%
20%–25%* customers Detailed subjective credit underwriting
15%– 20%
Maximum LTV
15%–20%* cases Rejected upfront to improve process efficiency
5%– 19%
Risk-based pricing
Auto financing market in India – Point of view
Maximum fina financing na n ancing amount
Maximum tenor
7. Limit credit losses through a robust collections framework
Mid buckets
Early buckets
Current Due
Bucket 1 (DPD 0-30)
Bucket 2 (DPD 31-60)
Bucket 3 (DPD 61-90)
Hard buckets
Bucket 4 (DPD 91120)
Bucket 5 onwards (DPD 120+)
Objective
Prevent delinquencies
Collect better to minimize flow
Recover as much as possible
Ownership
In-house + Outsourced
In-house + Outsourced
Largely outsourced
Collaboration
Sales involvement for non-starter, early defaulters
Legal involvement
Extensive use of legal
Activity
Tele-calling and SMS/IVR reminders
Field collections Restructuring
Repossessions and recovery
Analytics
Decision trees
Collections score-cards
Repossession agencies
IT tools
• Centralized Collections IT system to track bucket wise case movement • Exhaustive MIS (Bucket/Asset/Collector wise flow and normalization performance) and Analytics • Hand-held devices for field collectors with receipt generation capability
Leading practices
Page 27
A rural finance company requires Sales Executive to handle early bucket collections to encourage right sourcing and manage customer relationships
Leading private sector banks monitor pre-NPA accounts stringently and use legal effectively
Auto financing market in India – Point of view
NBFCs dealing in cash collections utilize mobile apps for tracking of collections force; online sale of repossessed vehicles for faster disposal
8. Create a best in class customer acquisition experience
by enabling faster approvals Application 1
Awareness /knowledge
Underwriting
2
3
Select and apply
Loan processing (Soft approval)
Disbursement
4
5
Loan sanction (Hard approval)
6 Disbursement
Documentation 48-72 hours
24-72 hours
1.1 Customer is informed about auto finance product by the DSE*
2.1 Customer provides basic information for prequalification
3.1 Hygiene checks performed at Bank processing unit
4.1 Field Investigation and Telephone Verification triggered as applicable
5.1 List of predisbursement documents shared with customer
Verification of original documents
Customer receives targeted marketing offers for auto loan products
2.2 DSE suggests financing product/ provider as per customer profile
3.2 Basic eligibility criteria verified (e.g. income, CIBIL, dedupe, ITR checks) and sample RCU
4.2 Credit assessment conducted as per internal scoring models
5.2 Customer drops off documents at the dealership/ branch
Execution of loan agreement at customer office/ residence or bank branch
Customer visits the financier’s branch/ website/ mobile banking to obtain information
2.3 Customer provides initial documentation to the DSE
3.3 Soft approval communicated to the dealer/ customer
4.3 Deviations checked and approvals taken as per authority matrix
5.3 FE visits customer to collect the documents from customer’s residence/office
Dealer submits down payment receipt
Customer compares financier products through TPT websites such as bankbazaar, cartrade etc.
2.4 FE* logins the customer application and uploads scanned copy
3.4 Customer decides to proceed or refer alternative financiers for better offer
4.4 Approval communicated to customer/ dealer
5.4 Physical file transfer from dealership to financier office
Loan disbursed to dealer
Customer receives pre-approved loan offer basis existing relationship with financier
Dealer given a portal access integrated with the financier’s systems
Customer tracks application status through Net-banking/ Phone-banking
Dealer Sales Executive
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Call center executive
Digital
Finance executive
Field agents
Financier systems
Dealer-led
Auto financing market in India – Point of view
Bank-led
Third party-led
Pain points
Standard Practice
Leading Practice
9. Keep funding costs under control through appropriate
mix and parental support 1 Sources of funds
Liquidity risk is not a major concern for NBFCs in India. Multiple liquid debt instruments such as bank borrowing, CPs, NCDs and ICLs are available from the Indian market. Recently, a new instrument of rupee-denominated bonds that can be issued in the international markets has been permitted
Parent support
Letter of comfort, corporate guarantee from global parent can improve credit rating and has a positive impact on borrowing costs to the extent of 1%–2%
FPI route
Global parent can invest in the debt borrowings (CPs and NCDs) issued by the Indian finance entity, through the FPI route
Rating and security
Issuing NCDs requires a minimum credit rating of “A2” and issuing CPs requires a credit rating of “A3”; furthermore, all NCDs, including short-term NCDs should be fully secured thus rating and security are key considerations for a NBFC
2
3
4
5 Cost of funds
While the equity component varies, the cost of funds ranges between 8.5%–11% for majority of finance companies
Asset Liability Management
~20%–50% of outstanding book is typically short term in nature; Most entities have an ALM mismatch in the initial years, diverse funding sources available in the later years reduce the ALM mismatch
6
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Auto financing market in India – Point of view
10. Maintain ROA above 2% by deploying these principles
Bank
NBFC
Interest income Cost of funds
13%
NBFCs have higher lending rates on account of higher cost of funds than banks, which rely primarily on lowcost deposits for funding NBFCs rely on expensive market instruments such as bank loans, NCDs and CPs driving up cost of funds
8.5% 4.5%
Fee income
0.5%
Total income
5%
Opex
2.5%
Banks have a higher allocated opex, which consists of employee expenses, branch expenses, technology and also increased compliance costs
0.5%
Credit losses in the industry are stable at 0.4-0.8%
2.0%
Overall NBFCs make a higher RoA than banks over the long term on account of higher yields and portfolio mix
RoA
Page 30
Cost of funds Margin
Margin
Credit losses
Interest income
Fee income primarily includes processing fee on loans
Auto financing market in India – Point of view
10.5%
6.0%
4.5%
Fee income
0.5%
Total income
5.0%
Opex
Credit losses
RoA
3.0% 0.5% 1.5%
About EY
EY has significant capabilities across the auto financing value chain 1 Strategy and Business model
Brand strategy
CUSTOMER MANAGEMENT Segmentation and Profiling
SALES AND MARKETING Campaign Development and Management
Products selection
Advertising and Campaigning
Customer Service
Branding and Marketing
Customer Grievance redressal Rewards and Loyalty
Product Development and Management
Customer profitability
Sales force Effectiveness
Customer Life Cycle Management
3rd Party Products distribution
4 Organization Structure and Roles
Manpower Planning
Employee Cost Optimization
6 Business Page 32and IT alignment
STRATEGY AND PLANNING Corporate Market communication assessment FINANCE
Investment and Break even
Capital Structure
2
Vision and Mission
Technology Architecture
Balance Sheet Management and ALM
ROE / ROA
OPERATIONS AND PROCESSES End to end Workflow
DEALER FINANCING
Retail back Office Operations
Subvention
Centralized processes
Loss sharing
Integration with dealers / vendors
Limit management
Inventory funding
3
CHANNEL MANAGEMENT
WC funding
Process Automation
Inventory monitoring
5
Credit Risk Market Risk Operational Risk Internal control & Fraud Management
Digital capabilities Call center/IVR (outbound, inbound)
Service Levels
Treasury Operations
5
Governance
External vendor management
Talent Attraction and Retention
TECHNOLOGY IT Sourcing and NBL assistance Loan Origination vendor mgmt Solution
RISK MANAGEMENT ANDTREASURY
Branch Network
HUMAN CAPITAL MANAGEMENT Talent Management HR Systems and and Skill Upgradation Processes
Performance Management and Incentivization
Transfer Pricing
Dealer Operations
Process Documentation
Partnerships and alliances
Operating model
Legal, Compliance and RBI reporting
Leadership Development and Succession Planning Change Management
Helpdesk and Support
Enterprise Control
EY’s Automotive team comprises of ~7300 practitioners across the world EY Global Automotive Practitioner Network Americas 2497
EMEIA 2840
UK 180 U.S. 1556
AsiaPac 1550
Germany 827 China Korea 873 117
France 178 Italy 161
Mexico 333
Auto financing market in India – Point of view
Japan 444
Thailand 159 Philippines 76
India 648
Brazil 290
Page 33
Japan 444
Indonesia 91
..and a ‘industry’ experienced local auto finance execution team Global Automotive Finance Leader
India Financial Services Advisory leader
Jens Diehlmann Partner
Rohan Sachdev Partner
►
18 years of automotive finance experience
►
Co-author of the Book “Automotive Management” which comprises the full automotive value-chain under the focus of financial aspects
►
Leader, Financial Services – Performance Improvement practice in India
►
15 years of experience in assisting large international and domestic BFSI entities in strategic and operational transformation
India Leader – Automotive Sector Rakesh Batra Partner ►
Account partner for large auto OEMs globally and in India
►
Leadership experience in assisting large automotive and eco-system players in strategic and operational improvement
Auto Finance Team Bhavin Sejpal Manager
Page 34
Partner – financial services and auto finance expert
NBFC leader and auto finance expert Himanshu Bansal Director ►
Over 14 years of Banking & Consulting experience in Strategy, customer solutions and retail lending
►
Extensive leadership experience consulting auto finance companies and captives in market entry
Auto Finance Team Trupti Bagwe Manager
Fali Hodiwalla Partner ►
15 years of experience with advising banking and financial services clients
►
Extensive leadership experience in defining entry strategy and setting up captive auto finance entities in India
Auto Finance Team Vivek Sapre Manager
►
BFSI experience of over 5 years with focus on retail and wholesale finance segment
►
BFSI experience of over 5 years with focus on non-banking finance space
►
BFSI experience of over 5 years with industry experience in auto finance
►
Recently assisted a large OEM in feasibility study for a captive finance company set-up
►
Extensive experience in auto finance market entry, strategy and operational improvements
►
Assisted large vehicle finance companies in operational transformation and new company set-up
Auto financing market in India – Point of view
EY Offices
Ahmedabad 2nd floor, Shivalik Ishaan Near. C.N Vidhyalaya, Ambawadi, Ahmedabad - 380 015 Tel: + 91 79 6608 3800 Fax: + 91 79 6608 3900 Bengaluru 12th & 13th floor , “U B City” Canberra Block, No.24, Vittal Mallya Road Bengaluru - 560 001 Tel: + 91 80 4027 5000 + 91 80 6727 5000 Fax: + 91 80 2210 6000 + 91 80 2224 0695
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Page 35
Mumbai 14th Floor, The Ruby 29 Senapati Bapat Marg Dadar (west) Mumbai - 400 028 Tel :+ 91 22 6192 0000 Fax : + 91 22 6192 1000 5th Floor Block B-2, Nirlon Knowledge Park Off. Western Express Highway Goregaon (E) Mumbai - 400 063 Tel: + 91 22 6192 0002 Fax: + 91 22 6192 3000 NCR Golf View Corporate Tower - B Near DLF Golf Course, Sector 42 Gurgaon – 122 002 Tel: + 91 124 464 4000 Fax: + 91 124 464 4050 3rd & 6th Floor, Worldmark-1 IGI Airport Hospitality District Aerocity New Delhi-110037, India Tel: +91 11 6671 8000 Fax +91 11 6671 9999
Auto financing market in India – Point of view
4th & 5th Floor, Plot No 2B, Tower 2, Sector 126, Noida - 201 304 Gautam Budh Nagar, U.P. India Tel: + 91 120 671 7000 Fax: + 91 120 671 7171 Pune C-401, 4th floor Panchshil Tech Park Yerwada (Near Don Bosco School) Pune – 411 006 Tel: + 91 20 6603 6000 Fax: + 91 20 6601 5900
For further insights, please contact: Fali Hodiwalla Partner Performance Improvement - Financial Services Email:
[email protected] Phone: +91 98201 39302 Himanshu Bansal Director Financial Services – NBFC sector Email:
[email protected] Phone: +91 97698 43789
Ernst & Young LLP EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit www.ey.com/in. Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata – 700016 © 2016 Ernst & Young LLP. Published in India. All Rights Reserved. EYIN1602-014 ED None This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. PP