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Indias Changing Automobile Finance

Indias Changing Automobile Finance

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Published by Infosys
Infosys Finacle thought paper on changing automobile loan trends
Infosys Finacle thought paper on changing automobile loan trends

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Categories:Types, Brochures
Published by: Infosys on Jun 01, 2013
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06/03/2013

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India
s changing middle class tastes
whet the appetite for automobile finance
Thought Paper 
 
Universal Banking Solution |Systems Integration | Consulting | Business Process Outsourcing
 
 
India
s changing middle class tastes whet theappetite for automobile finance
Henry Ford invented the first automobile,right? Wrong. The first automobile was actuallyinvented by Sam McLaughlin, a Canadian fromOshawa, Ontario. He went into partnershipwith American David Buick to mass-produceMcLaughlin-Buick vehicles, a year before theModel
T
arrived. Subsequently, car registrationclimbed from 178 in 1903 to just over 2,000 by1908. Selling cars was a challenge during thisperiod, until an extraordinary salesman andentrepreneur, William Durant, entered thefledgling automobile industry. William
Billy
 
Durant founded General Motors and was the firstto introduce automobile financing.
 Automobile loans were not common in India
until the 1990s, and were restricted to the rich.Ordinary citizens did not or could not take loansbecause they didn
t earn enough or thought
that it was less important to own a car when
compared to other essential needs. They fearedthe risk or were more interested in saving for the future. All that changed with the liberalizationof the Indian economy around 20 years ago.This paper analyzes the impact of affordableautomobile loans in the middle class consumer mindset and its long term impact andimplications on the Indian society.
Consumer perception and scenario in the 80s
 
The consumer mindset of the 1980s was one of caution and savings orientation. Government jobs - low paying, but secure - were preferred.People couldn
t aspire beyond one house, andspent their entire working life paying for it.Owning a vehicle was low priority and theabsence of easy, low cost vehicle finance was afurther dampener.If one analyzes the balance sheet of the banksin the early 80s, the percentage of vehicle loans(individual personal vehicles) in the books of the bank, when compared to the overall assetsize of the bank was very less. The number of products under vehicle loan category offeredby banks and the demand for loans from
customers was very less.
Emergence of automobile finance in Indiaand role of banks
The liberalization of the Indian economy in theearly 90s
brought in a host of foreign investorsand banks which revolutionized the growth of industries across the economy. There wasspecial focus on the automobile industry, whichproduced passenger cars and multi-utilityvehicles, since it contributed significantly to theGDP growth of our country.Job opportunities in automobile, IT and other industries increased the wealth and purchasing
02
Thought Paper 
power of the middle class manifold; peoplewho couldn
t afford a single vehicle, were nowbuying luxury cars or expensive two -wheelers.The automobile industry responded to therobust demand with both high-end andaffordable models, and approached banks andfinancial institutions to offer vehicle financeat competitive rates. Both these measuresaccelerated the automobile industry
s growth.
 
 
Consumer perception and scenario from
the1990s
onwards
The trend started changing in the early 1990s.There were better job prospects because of theprivatization of the Indian economy and thedisposable income of the middle class was high.With the availability of a plethora of easy optionsand auto loan at reasonable rates of interest,
owning
the dream car 
was now a reality for 
the average middle class consumer. The abovefactors have contributed significantly inchanging the customer mind set from being
risk averse
to being seen as
risky investors
, asthey started to purchase houses and carsthrough home and car Loans.Indian banks and financial institutions offered avariety of automobile loans, as listed below:Margin Money Scheme: Under this scheme, theborrower is required to pay margin money of atleast 10% of the total loan amount, along withone Equated Monthly Installment (EMI). Thebalance is paid through post-dated chequesacross the tenure of the loan. Advance Equated Monthly Installment Scheme:This scheme offers 100% financing. The borrower has to pay up to five EMIs in advance and thebalance through post-dated cheques across thetenure of the loan.Security Deposit Scheme: Under this scheme,the borrower is required to make a securitydeposit against the loan amount, which isrefunded at the end of the tenure. This is themost widely used type of loan.Hire Purchase Scheme: This is an agreement to
let the car on hire, under which the hirer has
the option to purchase the car subject to certainconditions. Hire purchase is mostly offered bynon-banking Finance Companies.Lease Financing Purchase: A lease is a hiringcontract between the owner of an asset (thelessor) and its user (the lessee). The ownership
rests with the lessor, who gives the right of 
usage to the lessee for an agreed duration inreturn for periodic payments.
 Automobile finance growth factors
Research says that 75% of vehicles purchased inthe last decade were financed through loans.Here are the key drivers of this growth:
Liberalization of the economy to allowentry of private sector banks and other financial institutions
Economic growth, especially in the IT sector,leading to higher disposable income. Youngprofessionals buying their first vehicle barely ayear or two into their jobs
Securitization of automobile loans in theaftermath of the 2008 financial crisis
Availability of credit data, enabling banks tooffer higher 
loan to value
and ballooninstallment schemes at affordable EMIs. Also,availability of loan management softwareenabling banks to launch market and trackproducts easily.
Spread of automobile finance to hithertounderserved locations,
as
automobilemanufacturers and distributors set up shopacross the country
Emergence of direct selling, collection andrecovery agents, supporting banks throughout
Thought Paper 
03

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