Financiers buy into India’s used car business amid uptick in demand | Business Standard News

lipped from: https://www.business-standard.com/article/automobile/financiers-buy-into-india-s-used-car-business-amid-uptick-in-demand-121041301382_1.html

An expansion of demand driven by economic uncertainty has accelerated the plans of organised players to tie up with banks and NBFCs

GirnarSoft, which owns CarDekho, an online marketplace for used cars, has seen the share of buyers who opt for finance jump from 5-8 per cent to 12-15 per cent in the past one year

Buying a pre-owned car on credit has gained traction in the past one year as buyers of such vehicles are finding greater comfort in engaging with organised used car channels that warrant better quality cars and hassle-free paperwork. Better asset quality has also encouraged banks and non-banking financial companies (NBFCs) to join hands with those in the organised used car space.

As a result, on an average, the penetration of finance in the used car segment has spiked to 18-20 per cent from 8-10 per cent in the past one year, said officials at organised used car firms. While that’s an encouraging trend, it’s still very low when compared to new cars, where finance penetration is as high as 75-80 per cent.

GirnarSoft, which owns CarDekho, an online marketplace for used cars, has seen the share of buyers who opt for finance jump from 5-8 per cent to 12-15 per cent in the past one year. For Mahindra First Choice Wheels, the used car business of the Mahindra Group, the jump in the number of those opting for finance has been higher. At an all-India level, the finance penetration in used cars at Mahindra First Choice dealerships has grown sharply from 25 per cent to 45 per cent during the past year.

An uptick in demand for finance has prompted CarDekho to seek an NBFC licence and transform its finance arm into a hybrid fintech (financial technology) unit. Currently, it offers finance to its buyers through the multiple tie-ups it has with prime and subprime lenders. Buyers can choose the financiers online and execute the whole process digitally.

Lenders with which CarDekho has tie-ups disbursed a total of Rs 2,400 crore at the end of financial year 2020-21 and the online used car platform expects it to increase to Rs Rs 6,000 crore by end of FY2021-22, said Namit Jain, head of financial services at CarDekho.

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“There is a massive growth in the category (used cars) due to the demand for personal mobility,” said Jain.

The GirnarSoft-owned company has seen a 20 per cent growth in volumes month-on-month over the past six months, he added.

Ashutosh Pandey, MD and CEO, Mahindra First Choice Wheels, points out that owing to the increase in demand for used cars in the past year, banks and NBFCs have offered competitive interest rates (the internal rate of return differential between financing for used and new cars is down from 400-500 basis points to 250-350 basis points now).

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India’s used car market is estimated to reach between 6.7 million units and 7.2 million units per year by 2022, according to an outlook report by Mahindra First Choice. Most of the companies in the used car business have seen a massive surge in demand owing to a strong preference for personal mobility so much so that demand has been outstripping the supply.

As much as the economic uncertainties spawned by the pandemic are prompting buyers to opt for used cars instead of a new one, there is also a propensity among the existing owners to defer purchase of a new car and hold on to the existing one. Then there are also those who are resorting to distress sales. This, to some extent, is making up for supply constraints.

Pandey also attributes the higher penetration of finance to an increasing share of organised players in the used car space. Mahindra First Choice added about 200 new outlets last year.

“This is giving confidence to customers to consider used cars when they want to purchase a new vehicle. This has increased the demand for financing solutions,” he said.

A better quality of cars coming to the used car dealerships is improving the asset quality, and therefore, the inclination of banks and NBFCs to extend finance for them, according to Pandey.

Shrunken wallets amid salary cuts and job losses are also fuelling demand for finance in the segment. A recent survey by Olx suggests seven out of ten transactions are taking place in the compact car segment as buyers are a lot more value-conscious now.

“The need for personal mobility and a hit on the disposable incomes has stoked demand for finance,” said Kavan Mukhtyar, partner and leader, automotive, PwC. Mukhtyar, however, added that the number of those opting for finance will never be on a par with those buying new cars. Used car buyers may or may not have the credit history required by the financiers, he said. “At the most, we see it go up to 60 per cent in the next three to five years.”

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