Auto & Auto Loan Industry

The automotive sector in India is expected to rebound

PV market is expected to grow at a CAGR of 12% over next 5 years 12.9%
5
12.5%
4.6
4.5
12.1%
4.1
4
11.8%
3.6
3.5 11.4% 3.2
Sales in Milion

2.9
3 2.6 2.7 2.6

Y-o-Y Growth
2.5
2.5
2
1.5
1
0.5
0
FY12 Actual FY13 Actual FY14 Actual FY15 Actual FY16 FY17 FY18 FY19 FY20

Sales in Million Linear (Sales in Million)

 India is expected to witness high growth in PV 2016-20 period as the economic environment improves amid a strong reform push by the new govt.

 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 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%

With good monsoons, improved macro-economics & strong pipeline for new models, the industry is
headed towards a positive trajectory.
 The Indian Auto Finance market has gone through several changes over
the last 18 years

1998-2006 2007-2009 2010-2015

Business - Strong auto sales growth (~20%) and -Liquidity crunch, rising defaults, -Intense competition leads to reduced
circumstances liquidity in economy attracts banks increase in interest rates dampens sales interest, product innovation
growth (~9%)

- Aggressive to capture auto financing - Reluctance to lend to retail segment -Focus on building strong OEM
market share relationships
Financiers needs
-Focus on increasing penetration and
volumes

- No specific financing needs - Seek to increase focus on semi- -Consolidate/strengthen market

OEM needs urban/rural areas position and improve dealer control &
- Focus on relationship with financier profitability

Source: EY analysis, market insights

 OEM’s too have underwent a substantial change over the last 18 years

OEM Financing
1998-2006 2007-2009 2010-2015
Strategy

All OEMs All OEMs; some OEMs tie up with local Maruti, Hyundai , Honda, GM, Fiat.
Financier market NBFCs to increase rural focus.
tie-ups Maruti with MMFSL

Maruti tied up with Citicorp Financial to No white label financiers in market after CMFL experiment failed
White-label finance form Citicorp Maruti Financial ltd

MMFSL & TATA Motor Finance

Indian captive

Limited presence: GMAC, Ford’s JV with Existing players exit; no new entrants VW (VW, Audi
Foreign captives Kotak , Skoda, Porsche), BMW, Daimler, Toyota
, Renault-Nissan, Ford

Source: EY analysis, market insights

 Bull run for Auto Finance market backed by strong PV demand

New PV finance disbursement have turned positive and will continue to grow

LTV ~85 ~90

Penetration CAGR: ~6% ~75 CAGR: ~17% ~80

2000 1636
1403
1500 1169
997
1000 761 868
601 650 711 694
500
0
FY11E FY12E FY13E FY14E FY15E FY16P FY17P FY18P FY19P FY20P

The new PV finance market is attractive due to current substantial size, high finance penetration and
strong underlying asset sales, which will continue to drive the market growth in the future.
 NBFCs and captives have emerged as the growth engines of the auto
financing industry
Changing competition landscape in new PV finance Top 10 players account for ~80% share of the new
120% PV financing market
Outstanding vehicle finance book (INR Bn)

~700 ~1000 ~1700

100% 5% 10% 12% The top 3 Pvt banks dominates due to their wide customers
11% base, competitive rates, customer service etc.
80% 15% Cross selling by aggressive marketing and dealer-tie-ups
18%

36%
60% 30% 23%
Except SBI, most of the other PSU’s have lost significant share
40% due to high NPAs and tight credit policies following the crisis.

48% 45% 47%

20%
NBFCs have increased their market share by expanding to non-
metro areas and catering to high risk customers
0%
FY10E FY12E FY15E

Private Sector Bank Public Sector Bank NBFCs Captives Captives have increased their share too by bundled products.

The new PV financing is highly competitive in nature with private banks holding on to the market; NBFCs and captives have been
able to gain market share by identifying niche in terms of under-catered regions or innovative products

Source: EY analysis, India Ratings and Research reports

 Auto Loan Origination- Finance source analysis

Finance Ratio
40%

30% 30%

[VALUE]
Finance
Cash
[VALUE]
DEALER DSA DSA DST

Source

Dealer DSA
• Loans sourced by Dealer’s sales
executive at dealership (generally
linked to INF)
• Non-standardized Dealer pay-outs
( 0 percent to 4 percent)
Independent DSA & Financier Affiliated DSA
• Uses own customer’s network to source loans and help
with purchase of vehicle.
• No formal agreements with Financiers.
• Financier affiliated DSA has agreement with Financiers
to source loans. Incentive based commission (i.e: non-
payroll)
Bank Direct Sales Team (DST)
• Financier's internal sales team.
• Uses bank's internal customer database
for lead generation.
• Receives lowest pay-out incentives.
Target driven
 Auto Loan Origination- Finance At Dealership- Sales

Sales Manager Sales Executive

Dealer Principal GM-Sales

Finance
Finance Manager
Executive/Banker

GM- Sales
Dealer Sales Executive
• Negotiates payouts with financiers & handles channel financing.
• Responsible for Dealer profitability across group or single site plus RSOs and
branches. • Customer facing, sales focused role.
• Offers finance to customers during vehicle purchase process
• Receives incentives- Foreign trips, Sodexo, cash per login
Sales/Finance Manager (Key Man — Finance Penetration)
Bank Representative (Bank's payroll)
• Motivating Sales Executives to achieve monthly targets.
• Pushes Financiers for retail approvals, timely payments, deviations
• Ensures accuracy of applications and document requirements.
• Financier's not strict with finance targets due to competition, linked to INF • Uploads or couriers application file to processing center.
Dealer’s customer acquisition experience

Process 1 :- Application

1
1.1 Customer is Customer visits the Customer compares
Awareness/ informed about auto
Customer receives
targeted offers for auto
financier financiers products
finance product by the branch/website/mobile through website such as
Knowledge DSE*
loan products
to obtain information cardekho etc

2
2.2 DSE suggests 2.4 FE* logins the Customer receives pre-
2.1 Customer provides 2.3 Customer provides
financing customer application approved loan offer
Select & Apply basic information for
product/provider as per
initial documentation to
and uploads scanned basis existing
pre-qualification the DSE
customer profile. copy relationship

Dealer Sales Executive Call Center Executive Financial Systems Digital Financial Executive Field execution

Standard Leading
Dealer-Led Bank-Led Third Party-led Pain points
Practice Practice
Underwriting Process

Process 2 :- Underwriting

3 3.2 Basic eligibility

Loan Processing 3.1 Hygiene checks
performed at Bank
certified verified (e.g.
income, CIBIL, dedupe, I
3.3 Soft approval
communicated to the
3.4 Customer decides to Dealer given a portal
proceed access integrated with
(Soft Approval) processing unit TR checks) and sample dealer/ customer the financier’s systems
RCU

4
Customer track
Loan sanction 4.1 Field Investigation
and Telephone
4.2 Credit assessment
conducted as per
4.3 Deviation checked
and approvals taken as
4.4 Approval
communicated to
application status
through Net-
(Hard Approval) verification triggered internal scoring models per authority matrix customer/dealer
banking/Phone-banking

Dealer Sales Executive Call Center Executive Financial Systems Digital Financial Executive Field execution

Standard Leading
Dealer-Led Bank-Led Third Party-led Pain points
Practice Practice
 Pre-Sanction Stage- Private Banks & NBFC (Rural)

Private Banks 1. Due Diligence NBFC (Rural)

• Basic Docs (KYC) -ID & Address Proof • Rigid Document • Supporting Document Flexibility -
• Supporting Docs -Income & Employment Proof Requirement, for PSU banks Qualitative approach to credit appraisal

2. File Upload
• File Upload -Bank rep. checks & uploads app at • Limited Presence at Dealer
dealership • File Transfer -Physical files are passed to CAM center

3. Credit Bureau
Reports
• Credit Information Report -CIBIL, Experion, Equifax, CIBIL score between 300-900, Over 700, good customer, missed payments & defaults, 3yrs history

4. Document
Verification
• Validate Authenticity -Soft copies, 15-20% sample of hard copies (PAMAC), conducted by RCU teams at RO’s, O/S staff

5. Customer
Verification
• ID Verification -FI Agency, Home or workplace visit, phone for low risk customers, FI’s from RO’s, O/S staff, risks delaying approval
 Back Office Operations- Post Sanction
Check Post sanction Items
• Loan agreement, PDC’s, Margin
receipts, Insurance policy
copy, registration docs, are verified at
banks CPU center
• Checked: No errors, all relevant pages
signed
• Most of the forms are filled by sales
executive or banking executive.
Customer’s Payment detail’s in
LMS
• Data transferred from LOS to LMS
• LOS: Loan origination System- All detailed
information of customer with supporting
documents attached.
• LMS: Loan Management System-Additional
details are entered for customer’s payment
information like EMI, Payment date, tenure
ECS, bank details etc.
• PDC details are entered & verified.
• Within LMS, Loan Account Number (LAN) is
generated, used for all correspondence.
Generate payment schedule &
funds disbursal
• Automated process within LMS, with EMI
scheduler
• After all details are captured, a final pre
disbursal approval is required before
disbursal.
• This approval is done by another credit
manager or one up guy.
• Second approval is just maker and checker
thing.
• In some banks, portfolio’s health is linked to
KPI and not only amount disbursed.
Best in class customer acquisition experience by enabling faster
approvals

Process 3 :- Disbursement

5
5.3 FE visits customer to
5.1 List of disbursement 5.2 Customer drops off 5.4 Physical file transfer
collect the documents
Documentation documents shared with documents at the
from customer’s
from dealership to
customer dealership/branch financiers office
residence/office

6
Execution of loan
Verification of original agreement at customer Dealer submits down
Disbursement documents office/residence or bank payment receipt
Loan disbursed to dealer
branch

Dealer Sales Executive Call Center Executive Financial Systems Digital Financial Executive Field execution

Standard Leading
Dealer-Led Bank-Led Third Party-led Pain points
Practice Practice
 Post-Sanction & Disbursal Stage

Post sanction Disbursal Post Disbursal

Docs Required Process Docs Required

1. Car Loan agreement 1. Cases adjusted against INF account. 1. Final Invoice
2. 6 PDC’s 2. Normal case, FI’s use RTGS to transfer funds 2. Registration receipt
3. Margin money receipts to dealer 3. Copy of RC
4. Insurance Policy Copy 3. Dealer Payouts are paid monthly
5. Registration Docs( F-34/5) 4. Incentives in cash or kind are paid to sales
executive, finance managers etc.
Process 5. Welcome message, call is made & Kit is sent
to customer with amortization chart.
1. Sales executive collects post sanction docs.
2. FI’s operations team examines & issues DO
3. Payment schedule is updated in LMS
4. Application forms & PDC’s stored in central
hub
5. Final pre-disbursal authorization required
prior funds being released
Back Office Operations- Post Disbursement

Process

1. Critical for financier to check funding

against final Invoice & HP.

2. It takes around 30 days for RC to be

issued

Amortization chart
 Loan Repayment Methods

Cash Deposit ECS PDC’s

• ECS works just like auto-pay. • Pre-signed PDC’s are collected for the
• Customer visits branch & pays EMI
tenure-1 of the loan.

• Customer authorizes their bank account to • PDC must be presented within 3 months
• Sales representative or collection
be debited for X EMI on Y date every of the date stated.
agents visits and collects EMI
month
• PDC’s are stored at centralized locations.

• They are organized into batches of the

same payment cycle and sorted according
to the bank.
 Payment Type Usage Overview

[PERCENTAGE]
[VALUE]%
[PERCENTAGE
PDC ] PDC
ECS ECS
[PERCENTAGE
Cash Cash
[PERCENTAGE ]
]
[PERCENTAGE]

Urban Semi - Urban

• Use of ECS has risen sharply as increase in bank’s coverage area.

• More ECS leads to less risk of human error and less human resource required for processing

• Banking habits are changing in rural India, with financial inclusion the future looks brighter.

• PDC’s usage will fall further as banks have been advised not to accept any fresh PDC’s in locations where the facility of ECS is available
( RBI circular July, 2013)
 Payment Cycle

Type Financier Payment Cycle

Private bank ICICI 1st, 10th, 15th

IndusInd 7th, 21st
HDFC Bank 5th, 7th
NBFC Magma 1st, 10th, 20th
MMFSL 5th, 10th, 15th

• Payment date is determined when the funds are disbursed.
• Usually banks have 2 or 3 payment cycles (dates) per month.
• Financier’s prefer fewer payment cycles as this increases the efficiency of
processing payments.
• There is higher chance of payments bouncing at the end of the month, which
negatively impacts collection.
Deploy advanced credit assessment measures to price the risk
appropriately
Leading Some captives have deployed risk base pricing models, to provide interest rate and LTV based on customer risk profile and
Practices asset quality of the geographic location

Scoring parameters Scoring Decision Process Decision Typical Profile Underwriting decision

Score Band 1 Fast track approval - 10%-20%* customer Maximum

Profile Related - Premium profile Financing amount
customer jump the
queue and given fast
approval

Income Related Maximum tenure

Score Band 2 Standard Approval - 40%-50%* customer
- Regular approval
process (2-24 Hours)

Credit track record Maximum LTV

Score Band 3 Referral Approval - 20%-25%* customers
- Detailed subjective
credit underwriting
Micro-market
Risk-based pricing
based
Score Band 4 Rejected - 15%-20%* cases
- Rejected upfront to
improve process
efficiency
 Limit credit losses through a robust collection frameworks
Early Buckets Mid Buckets Hard Buckets

Current Bucket 1 Bucket 2 Bucket 3 Bucket 4 Bucket 5

Due DPD 0-30 31-60 61-90 91-120 120+

Objective Prevent delinquencies Collect better to minimize flow Recover as much as possible

Ownership In-house + Outsourced In-house + Outsourced Largely Outsourced

Sales involvement for non-starter, early

Collaboration Legal involvement Extensive use of legal
defaulters

Activity Tele-calling and SMS/IVR reminders Field collections Restructuring Repossessions and recovery

Analytics Decision trees Collection score - cards Repossession agencies

• Centralized Collection IT systems to track bucket wise case moment

IT Tools
• Exhaustive MIS (Bucket/Asset/Collector wise flow and normalization performance) and Analytics
• Hand-held devices for field collectors with receipt generation capability

A rural finance company requires Sales NBFCs dealing in cash collections

Executives to handle early bucket
Leading Practices
collection to encourage right sourcing
and manage customers relationship
Leading private sector banks monitor
utilize mobile apps for tracking of
pre-NPA accounts stringently and use
collection force; online sale of
legal effectively
repossessed vehicle for faster disposal.
 Maintain ROA above 2% by deploying these principles

NBFC Bank

NBFC have higher lending rates on account of higher cost of

Interest Income 13% funds than banks, which rely primarily on low-cost deposits for Interest Income 10.5%
funding

Cost of funds 8.5% NBFC rely on expensive market instruments such as bank Cost of funds 6.0%
loan, NCDs and CPs driving up cost of fund
Margin 4.5% Margin 4.5%

Fee Income 0.5% Fee income primarily includes processing fee on loans Fee Income 0.5%

Total Income 5% Total Income 5.0%

Opex 2.5% Banks have higher allocated opex, which consist of employee Opex 3.0%
expenses, branches, technology and also increased compliance
costs
Credit losses 0.5% Credit losses in the industry are stable at 0.4%-0.8%
Credit losses 0.5%

RoA RoA
2.0% Overall NBFCs make higher RoA than banks over the long term 1.5%
on account of higher yields and portfolio mix
 Retail Issue Analysis

Area Challenge Implication

Products & Schemes • Retail schemes or plain vanilla products are influenced by payouts to • Lack of transparency
dealer’s & sales executive • Complexity in explaining bundled or fancy
• Inadequate training for sales executive. products.
• High attrition of sales executive.

Pre-Sanction • High lead time in physical transfer of docs. • Delays loan approval
• Slower customer verification (FI) • Decreases customer satisfaction
• Risk of customer cancelling loan

Pre-Disbursal • Customer and sales executive unable to track loan application • Delays loan approval
progress

Post- Disbursal • Docs ( RC copy, Invoice etc not matching) • Increase risk of fraudulent activities

Servicing • Weak support for any request • Customer gets frustrated, delays EMI’s
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