Improving macroeconomic environment coupled with higher government
focus on infrastructure and rural areas will help non-banking finance
companies (NBFCs) grow their vehicle loans at a faster clip over the
three fiscals to 2020, according to credit rating agency Crisil.
The
agency assessed that NBFCs will be clocking a compounded annual growth
rate (CAGR) of 15 per cent growth in vehicle loans over the three
fiscals compared with 12 per cent seen in the past three fiscals.
"The
market opportunity for NBFCs will stem from continued government
investments in the roads sector, expected finalisation of the scrapage
policy or the Voluntary Vehicle Modernisation Programme and higher
Budgetary spends for the rural sector," Crisil said.
The agency
also underscored that NBFCs will face structural challenges such as the
overhang of the Goods and 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 are other realities.
Financing segments
In
terms of segments, around 85 per cent of NBFC vehicle finance portfolio
comprises commercial vehicle and cars/utility vehicles financing. The
balance includes tractor and two- and three-wheeler financing.
While
all segments of vehicle finance are expected to grow faster than
before, Crisil said commercial vehicle financing, which constitutes 51
per cent of the vehicle finance portfolio of NBFCs, is expected to
rebound from the lows seen over the past several years.
CV
financing is expected to clock a CAGR of 14 per cent till 2020, on
account of which NBFCs would retain their share of over 65 per cent in
the overall CV finance market.
In a statement, the agency observed
that 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 up 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 per cent, leading to a commanding 80 per cent market share by
2020, he added.
The agency assessed that other major segment,
cars and utility vehicle (UV) financing, which constitutes 34 per cent
of overall NBFC vehicle finance portfolio, is expected to clock a CAGR
of 18 per cent over the next three fiscals.
Increasing disposable
incomes, sharper focus on Tier II/III cities, growing consumer
preference for higher-value UVs, and improving penetration of formal
finance are expected to propel growth.
Banks, according to the
Crisil statement, continue to dominate the cars and UV financing segment
with a share of 63 per cent, having gained 300 basis points 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. One basis
point (bp) equals one-hundredth of a percentage point.
Interesting trend
However,
within NBFCs, an interesting trend that has emerged in recent years is
the significant scale-up in the business of foreign-owned captive NBFCs
compared to domestic NBFCs in the cars and UV financing market.
According
to 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 four years in cars and UVs financing
market."