Beiqi Foton Auto Co. LTD - India's Auto Finance Market Overview

Jan 2010
Beiqi Foton Auto Co. Ltd.
India’s Auto Finance Market
India China Economic

and Cultural Council
New Delhi - Beijing
Beiqi Foton Auto Co. Ltd. India’s Auto Finance Market
Table of Contents
I. History of Auto Finance in India...................................................................................... 4
Major Historical Developments .................................................................................................... 4
Auto Sales vs. Auto Credit Balances Growth............................................................................. 4
II. Government Policy and Regulation................................................................................. 6

Brief Overview of India’s Auto Policy .......................................................................................... 6
Regulatory Body for Auto Finance Sector .................................................................................. 7
About RBI 7
Conditions for Establishing Auto Finance Company in India .................................................. 7

Conditions for Establishing Financial Leasing Company in India ............................................ 9
Conditions to Apply for Issuance of Financial Bonds ..............................................................10
III. Status of Auto Finance Market in India .................................................................... 11

Overview.........................................................................................................................................11
Automobile Industry 11
Auto Finance Industry 14
Future Prospects ...........................................................................................................................15

Automobile Industry 15
Auto Finance Industry 15
Types of Auto Finance Services ..................................................................................................17

Two-Wheeler Finance 17
Car Finance 17
Types of Loan .........................................................................................................................................................................18
Loan Process ...........................................................................................................................................................................19
Commercial Vehicle Finance 19
Features of Commercial Vehicle Leasing.........................................................................................................................20
Types of Loan .........................................................................................................................................................................20
Dealer Finance 21
Types of Loan .........................................................................................................................................................................21
Market Indicators ..........................................................................................................................22

Trend of Down Payment Proportion and Loan Length 22
Auto Consumption Credit Balance Growth vs. Industrial Output Growth 23
Auto Finance Proportion in Bank Credit 23
Bad Debt Ratio of Auto Finance Business 23
Ratio of Monthly Payment and Income, Ratio of Car Price and Income 24
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IV. Auto Finance Companies in India .............................................................................. 25

Overview.........................................................................................................................................25
Top Auto Finance Companies in India ......................................................................................25
Banking Auto Finance Companies 25
Services and Product Types (Some Examples) ..............................................................................................................26
Case Studies ............................................................................................................................................................................27
State Bank of India ......................................................................................................................................................27
ICICI Bank .......................................................................................................................................................................28
Kotak Mahindra Prime Limited (Kotak Mahindra Bank)........................................................................28
Non-Banking Auto Finance Companies 29
Case Studies ............................................................................................................................................................................30
Shriram Transport Finance Company Limited (STFC) ..........................................................................30
Auto Finance Services by India Auto Makers 30
Overview .................................................................................................................................................................................30
Services and Product Types ................................................................................................................................................31
Case Studies ............................................................................................................................................................................31
Tata Motorfinance Ltd..............................................................................................................................................31
Bajaj Auto Finance Ltd. ............................................................................................................................................32
Ashok Leyland Finance Ltd. ...................................................................................................................................32
Auto Finance Services by Foreign Auto Makers 33
Business Strategies and Product Types ............................................................................................................................33
Sources of Finance for Auto Finance Companies 34
Auto Finance Services Risk Management Measures 35
Securitization of Auto loans 36
Citibank Case..........................................................................................................................................................................36
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I. History of Auto Finance in India

Major Historical Developments
Gone are the days when people would dip into their cash reserves and savings to buy cars.
Almost all – both individuals and companies – prefer to buy vehicles on installments, because
that allows them the liberty of not having to invest a huge amount upfront. That’s the need gap
being filled by almost all banks and financial institutions, who now offer auto loans on lucrative
terms to consumers, egging them to fulfill their dreams and aspirations, just by paying some
extra interest.
In India, the action started in 2000 when Citibank started to offer loans for automobile
purchases. But its market share dropped from 27 per cent during 90s to less than 8 percent
during early 2000. Post-2000, a number of banks entered the market. ICICI Bank became the
new leader with almost 29.2 per cent market share during 2003-04. The journey continued till
2008 when HDFC bank took the lead in FY08.
In January 2008, the Reserve Bank of India reinforced the repossession rules, which withdrew
the right to repossess from the financer in cases of default by the customer. That led to
reluctance by finance companies and credit started drying up. A bigger jolt came when the
global subprime situation started spilling into the Indian financial system and defaults started
increasing. Although the situation has improved since then, accessing finance remains a
challenge for certain customer profiles and market segments.
The current trend shows that the PSU banks like SBI, PNB, Bank of Baroda, Bank of India,
Canara Bank, Syndicate Bank and Union Bank etc. are leaving behind their private sector
counterparts in the Rs. 22,000 crore passenger car and 2-wheeler loan market. Among the
public sector banks, State Bank of India is the market leader given its vast branch network. The
reason behind increase in market share of PSU banks is the fact that, private banks have been
compelled to reduce their exposure to the sector owing to increased delinquencies, while PSU
banks have stepped up their lending activity.
Auto Sales vs. Auto Credit Balances Growth

The domestic sale of automobiles in India has witnessed rapid growth in the period 2003 to
2008. The sale of two-wheelers grew at a CAGR of 8%, of Passenger Vehicles at 17% and of
Commercial Vehicles at 24% during the period 2003-2008. In the same period, the auto finance
market for two wheelers grew at a CAGR of 7%, of Passenger Vehicles at 18%, and of
Commercial Vehicles at 24% (Table 1). The same can be compared with details of growth in
domestic sales of automobiles in India from 2002 to 2009, provided in Table 2.
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Table 1: CAGR (Cumulative Annual Growth Rate) of Auto Sales in comparison with
growth of Auto Finance Market
Table 2: Domestic Sales Trend of Automobiles in India (‘000)
Domestic Sales Trend of Automobiles in India (‘000)

Category 2002- 2003- 2004- 2005- 2006-
03 04 05 06 07 2007-08 2008-09
Passenger
Vehicles 707.2 902.1 1061.6 1143.1 1380.0 1549.9 1551.9
Commercial
Vehicles 190.7 260.1 318.4 351.0 467.8 490.5 384.1
Three
Wheelers 231.5 284.1 307.9 359.9 403.9 364.8 349.7
Two Wheelers 4812.1 5364.2 6209.8 7052.4 7872.3 7249.3 7437.7
Grand Total 5,941.53 6,810.53 7,897.63 8,906.43 10,124 9,654,435 9,723,391
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II. Government Policy and Regulation

Brief Overview of India’s Auto Policy
In order to make India a power to reckon with in the automotive sector the government
launched the Automotive Mission Plan (AMP) 2006-2016.
The vision of the AMP is "to emerge as the destination of choice in the world for design and
manufacture of automobiles and auto components with output reaching a level of US$ 145
billion accounting for more than 10 per cent of the GDP and providing additional employment
to 25 million people by 2016." Fig 3 illustrates the contribution of auto sector to GDP in the
year 2006 and its projected figures for the year 2010 and 2016.
As per the AMP, it is estimated that the total turnover of the automotive industry in India
would be in the order of US$ 122 billion - US$ 159 billion in 2016. It is expected that in real
terms, India would continue to enjoy its eminent position of being the largest tractor and three-
wheeler manufacturers in the world and the world's second largest two-wheeler manufacturer.
By 2016, India will emerge as the world's seventh largest car producer (as compared to the
eleventh largest currently) and retain the fourth largest position in world truck manufacturing
sector. Further, by 2016, the automotive sector would double its contribution to the country's
GDP from current levels of five per cent to 10 per cent.
Table 3: Contribution of auto sector to GDP (in %)
The Indian Automotive Mission Plan (AMP) expects vehicles sales to grow to 32 million
by 2015–16.
 The size of the Indian automotive industry is expected to grow at 13 per cent per
annum over the next decade to reach around US$ 120 billion to US$ 159 billion by
2016.
 The total investments required to support the growth are estimated at around US$ 35
billion to US$ 40 billion.
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 The two-wheeler segment is expected to lead the growth, with an estimated sale of
27.8 million units by 2016.
 Total exports in the automotive sector would be around US$ 30 billion to US$ 35
billion, of which component exports would account for US$ 20 billion to US$ 25 billion,
and vehicle exports for the rest.
Regulatory Body for Auto Finance Sector

The regulatory body for auto finance sector is the Reserve Bank of India (RBI). The RBI
regularly monitors the bank lending rate and interest rates, which affects the auto finance
lending rate of banks and non-banking finance companies (NBFCs). It also provides guidelines
and establishes conditions for opening of banks and NBFCs in India.
About RBI
The Reserve Bank of India (RBI) is the central bank and the main monetary authority of the
country. RBI is the regulator and supervisor of the financial system in the country. It prescribes
broad parameters of banking operations within which the country's banking and financial system
functions. It manages the foreign exchange of the country. Performs merchant banking function
for the central and the state governments; also acts as their banker. Maintains banking accounts
of all scheduled banks. Issues and exchanges or destroys currency and coins not fit for
circulation.
Conditions for Establishing Auto Finance Company in India

Conditions for establishing an auto finance company are the same as that for establishing a
Non-Banking Finance Company in India. According to RBI guidelines, NBFCs doing Auto
Finance business are classified as AFCs.
RBI issued the Non Banking Companies (Reserve Bank) Directions, 1977, guidelines on
prudential norms and various other Directions and clarifications, from time to time for
governing the activities of NBFCs. Central Government, during 1974, introduced 58A in the
Companies Act, 1956 which empowered Central Government to regulate acceptance and
renewal of deposits and to frame rules in consultation with Reserve Bank of India (RBI)
prescribing (a) the limit up to, (b) the manner and (c) the conditions subject to which deposits
may be invited or accepted / renewed by companies. The Central Government in consultation
with RBI framed Companies (Acceptance of Deposits) Rules, 1975. Continuing this process, RBI
Act, 1934 was amended in 1997 which authorised the Reserve Bank to determine policies, and
issue directions to NBFCs regarding income recognition, accounting standards, NPAs, capital
adequacy, etc. The amended Act, inter alia, provided for compulsory registration of all NBFCs
into three broad categories, viz., (i) NBFCs accepting public deposit; (ii) NBFCs not
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accepting/holding public deposit; and (iii) core investment companies (i.e., those acquiring
shares/securities of their group/ holding/subsidiary companies to the extent of not less than 90
per cent of total assets and which do not accept public deposit).
Until some years back, the prudential norms applicable to banking and non-banking financial
companies were not uniform. Moreover, within the NBFC group, the prudential norms
applicable to deposit taking NBFCs (NBFCs-D) were more stringent than those for non-deposit
taking NBFCs (NBFCs-ND). Since the NBFCs-ND was not subjected to any exposure norms,
they could take large exposures. The absence of capital adequacy requirements resulted in high
leverage by the NBFCs. Since 2000 however, the Reserve Bank has initiated measures to
reduce the scope of ‘regulatory arbitrage’ between banks, NBFCs-D and NBFCs-ND.
Registration Requirements
In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be
registered with RBI to commence or carry on any business of non-banking financial institution
as defined in clause (a) of Section 45 I of the RBI Act, 1934. The NBFC is required to submit its
application for registration in the prescribed format along with necessary documents for Bank’s
consideration. The Bank issues Certificate of Registration after satisfying itself that the
conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.
Following is an indicative list of documents/information to be furnished along with the

application. All documents/information is to be submitted in duplicate.
1. Minimum NOF requirement Rs. 20 million.
2. Application to be submitted in two separate sets tied up properly in two separate files.
3. Annex II (Statement on prudential norms) to be submitted duly signed by the director/Authorized 21
signatory and certified by the statutory auditors.
4. Annex III (Information about the management) to be separately filled up for each director. Care
should be taken to give details of bankers in respect of firms/companies/entities in which directors have
substantial interest.
5. In case the directors are associated or have substantial interest in other companies, indicate clearly
the activity of the companies (whether NBFC or not).
6. Board Resolution specifically approving the submission of the application and its contents and
authorising signatory.
7. Board Resolution to the effect that the company has not accepted any public deposit, in the past
(specify period)/does not hold any public deposit as on the date and will not accept the same in future
without the prior approval of Reserve Bank of India in writing.
8. Board resolution stating that the company is not carrying on any NBFC activity/stopped NBFC activity
and will not carry on/commence the same before getting registration from RBI.
9. Auditors Certificate certifying that the company is/does not accept/is not holding Public Deposit.
10. Auditors Certificate certifying that the company is not carrying on any NBFC activity.
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11. Net owned fund as on date.

12. Certifying compliance with section 45S of Chapter IIIC of the RBI Act, 1934 in which director/s of
the company has substantial interest.
13. Details of changes in the Memorandum and Articles of Association duly certified.
14. Last three years Audited balance sheet along with directors & auditors 22 report.
15. Details of clauses in the memorandum relating to financial business.
16. Details of change in the management of the company during last financial year till date if any and
reasons thereof.
17. Details of acquisitions, mergers of other companies if any together with supporting documents.
18. Details of group companies/associate concerns/subsidiaries/holding companies.
19. Details of infusion of capital if any during last financial year together with the copy of return of
allotment filed with Registrar of Companies.
20. Details of the bank balances/bank accounts/complete postal address of the branch/bank,
loan/credit facilities etc. availed.
21. Business plan for next three years indicating market segment to be covered without any element of
public deposits.
22. Cash flow statement, asset/income pattern statement for next three years.
23. Brief background note on the activities of the company during the last three years and the reasons
for applying for NBFC registration.
24. II (b) is the company engaged in any capital market activity? If so, whether there has been any non-
compliance with SEBI Regulations? (Statement to be certified by Auditors).
25. Whether any prohibitory order was issued in the past to the company or any other NBFC/RNBC
with which the directors/promoters etc. were associated? If yes, details thereof.
26. Whether the company or any of its directors was/is involved in any criminal case, including under
section 138(1) of the Negotiable 23 Instruments Act? If yes, details thereof.
27. Whether the company was granted any permission by ECD to function as Full-fledged Money
Changers?
28. Whether the company was/is authorised by ECD to accept deposits from NRIs.
29. Whether “Fit and Proper” Norms for Directors have been fulfilled.
All NBFCs registered with RBI should make sure that they continue to be eligible to retain the
RBI Registration.
Conditions for Establishing Financial Leasing Company in India

Financial leasing companies in India come under the same category of Non-Banking finance
companies. Requirements for establishing NBFCs have been discussed in previous section.
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Conditions to Apply for Issuance of Financial Bonds

Foreign Institutions (FIs) are not required to seek issue-wise prior approval/registration from
the RBI for raising resources by way of issue of bonds, whether by public issue or through
private placement, subject to the fulfillment of the following conditions:
i) The minimum maturity of the bond should be 3 years;
ii) In respect of bonds having call/put or both options, the same should not be exercisable
before the expiry of one year from the date of issue of bonds;
iii) The yield to maturity (YTM) offered at the time of issue of bonds should not exceed 200
basis points above the YTM on the Government of India securities of equal residual maturities.
The effective YTM on instruments having call/put options should also satisfy this requirement;
iv) No 'Exit' option on the bonds should be offered before the end of one year, from the date
of issue.
The outstanding of total resources mobilised at any point of time by an FI, including the funds
mobilised under the 'umbrella limit', as prescribed by the Reserve Bank, should not exceed 10
times its net owned funds as per its latest audited balance sheet.
The limit fixed for raising resources is only an enabling provision. FIs are advised to arrive at
their requirements of resources along with the maturity structure and the interest rate offered
thereon on a realistic basis, derived, inter alia, from a sound ALM/Risk Management system.
In case of floating rate bonds, FIs should seek prior approval from the Reserve Bank, in regard
to 'reference rate' selected and the methods of floating rate determination. The same is not
required for subsequent individual issues so long as the underlying reference rate and method
of floating rate determination remain unchanged.
Fls should take note to comply with the prudential requirements of other regulatory authorities
such as SEBI, etc. Fls are required to furnish monthly statements to the RBI in the specified
formats. The statements relating to a month are to be submitted on or before the 10th day of
the following month. The details in respect of public issue of bonds are to be incorporated in
the statement for the month during which the respective issue is closed.
The statements are to be sent to the Chief General Manager, Financial Institutions Division of
Reserve Bank of India.
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III. Status of Auto Finance Market in India

Overview
Automobile Industry
Here is an overview of the relatively slow, albeit increasingly rapid, emergence of India's
automotive industry.
Fig 1: Timeline: India's Automotive Industry
(Source: Automobile Industry Presentation by India Brand Equity Foundation)
Many foreign firms have been eager to participate in the likely profits to be derived both from
the growth of the Indian market and from the development of India as a major producer and
exporter of cars, motorcycles, commercial vehicles and automotive components.
 Japanese major Nissan has decided to shift the entire production of its small car, Micra,
from the UK to India. After production of the Micra begins here, Nissan plans to
manufacture four more models in India, involving a total investment of over US$ 412.2
million.
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 Toyota Motors (TMC) plans to utilise the proposed Indo-Thai free trade agreement
(FTA) to make India a hub for small cars to be exported to its global markets. Toyota
has earmarked US$ 657.1 million for 2008-11 to set up a second plant in Bangalore to
make 200,000 cars from the current 80,000 units. The company is also keen to set up a
transmission and engine unit at the second plant.
 Suzuki Motorcycle India (SMIPL), a wholly-owned subsidiary of Japanese auto major
Suzuki Motor Corporation, plans to double production capacity of its two-wheelers to
300,000 units by the end of the current fiscal year. The company will invest Rs 125
crore (US$ 26.77 million).
 Ford Motor Company is investing US$ 500 million on transforming its India business
into a volume manufacturing and export hub and a regional centre of excellence for
small car development and production.
 Volkswagen has set a target to localise production in India to about 80 per cent in 2-3
years from the current levels of almost 50 per cent as it seeks to offer cars at more
competitive prices.
Fig 2: Global Major Auto Players in India
(Source: Automobile Industry Presentation by India Brand Equity Foundation)
To benefit from the technical competitive advantage of foreign firms, India firms have entered
into partnership with various foreign auto makers to develop high technology products for the
Indian markets. Fig 3 illustrates the foreign partners and partnership types of various Indian
OEMs (Original Equipment Manufacturers).
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Fig 3: Indian Auto Firms Partnerships with Foreign Auto Firms
(Sourc
e: Automobile Industry Presentation by India Brand Equity Foundation)
Automobile Industry Sales in 2009
In the passenger vehicle segment, India has emerged as the third highest growing market in the
world after China and Germany in 2009. While India's passenger vehicle sales were up 18 per
cent, China's 42 per cent growth propelled by a tax cut on cars announced in January 2009.
Germany saw 25 per cent growth buoyed by the incentives given for buying new vehicles in
exchange of old ones.
In December 2009, Indian automobile industry recorded an impressive 68 per cent growth in
sales, thereby continuing with the push it had received from two stimulus packages since 2008-
end and successfully beating the year-end blues.
According to the Society of Indian Automobile Manufacturers (SIAM), the total vehicle sales in
the country rose to an astonishing 10,00,500 units in December 2009 against a mere sale of
5,97,241 units in the year-ago period.
All major manufacturers like Maruti Suzuki, Hyundai Motor, Tata Motors, Hero Honda and
Bajaj Auto, registered healthy jumps.
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Auto Finance Industry
The Indian automobile sector is on a high growth trajectory thanks to the many exciting
automobile launches. Many choices are available in the market which gives the customer a good
reason to replace that old automobile or pick up a new one out of a wide variety available in
the market suiting all kinds of budgets and requirements. It is a thing of the past when
consumers used to dig deep in to their bank statements, plan their budget and save for months
to own their dream vehicle.
As in many other markets, a majority of vehicles – two-wheelers, passenger cars and

commercial vehicles – that are sold in India are bought by consumers with automobile loans.
About 80 per cent of cars in India are bought through loans, whereas the figure for commercial
vehicles is as high as 90 per cent. This has been possible because of the vast network of banks
and Non-Banking Finance Companies (NBFC) extending finance facility to consumers in India.
However, the car loan segment of the auto loans market has been more successful than the
commercial vehicle loan segment mainly because of factors such as perceived credit risk, higher
volumes and homogeneous nature of receivables. Fig 4 illustrates the growth in Passenger
Vehicle Finance market in India from FY03 to FY08.
Fig 4: PV Finance market in India (FY03 to FY08)
Source: CRIS INFAC
There are more than 35 financers in the market today, with the State Bank of India being the
leader. Easy availability of finance has been one of the most important growth drivers for the
auto industry from FY03 to FY07. Industry estimates auto loan portfolio of all banks put
together at around Rs 1,00,000 crore.
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The organized sector accounts for 71% of the entire auto finance market with the balance being
serviced by the local money lenders. Box 1 provides details of auto loan disbursements for the
month of September 2009.
Box 1: Disbursement of Auto Loans in September 2009
The auto finance market, estimated to be Rs 40,000 crore a year, has seen major changes in the past
few months. The top eight auto financiers disbursed loans worth Rs. 3,400 crore in September 2009—
the highest for a month in the past two years—led by impressive auto sales, new launches and return
of confidence among potential car buyers.
The disbursement in September is 25% higher than the monthly average of Rs 2,700 crore seen in the
past four months. Auto finance leader HDFC Bank has registered over 40% growth in loan
disbursement in September from a year ago, while other leading players such as Kotak Mahindra Bank,
SBI, Canara Bank, PNB and Bank of Baroda have also seen a growth of 25-35 %.
Future Prospects
Automobile Industry
India has the potential to become one of the top six automobile markets by 2015. After the US,
China and Japan – which dominate the global auto market – the next set of countries with
significant volume are Germany, India, Brazil and South Korea. Of these, only India is forecast
to grow significantly in the medium term. Industry estimates that the passenger vehicle market
will be nearly 2.8 million units by 2015 at a CAG of 10 per cent. Not only vehicles, but auto
components should actively contribute to this growth. On the other hand, we will see
diminishing importance of the mature markets of the US, Western Europe and Japan. Following
will the drivers of the Indian Automotive Industry in the coming years:
 Government Policies aiming at overall economic growth and offering low duties and
taxes.
 Increasing consumer demand with growth in income levels of consumers from Tier I1
and Tier III cities and easy availability of auto finance.
 Increasing cost competitiveness with emergence of India as a manufacturing hub, leading
to reduction in cost of automobiles.
 New product launches.
Auto Finance Industry

Auto finance was doing relatively well until the Reserve Bank of India, the country’s central
bank, reinforced the repossession rules in January 2008, which withdrew the right to repossess
from the financer in cases of default by the customer. That led to reluctance by finance
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companies and credit started drying up. A bigger jolt came when the global subprime situation
started spilling into the Indian financial system and defaults started increasing. Although the
situation has improved since then, accessing finance remains a challenge for certain customer
profiles and market segments.
To reach more and more consumers, OEMs are teaming with regional rural banks and local
NBFCs to overcome the challenge of credit shortage. In addition, some manufacturers are also
planning to set up their own financing arms. Fig 4 presents the outlook for auto financing in
India.
Table 4: Outlook for Auto Financing in India from FY08 to FY13 (F)
The total passenger vehicle finance market is expected to grow at CAGR of 13.3% from FY08
to FY13 with new passenger car finance market growing at 12.5% and new utility vehicle finance
market growing at 13% over the same period.
Key drivers for growth of Auto finance sector in India:

 Government thrust to give a boost to the rural economy
 Cross selling is becoming a key revenue driver in financial services sector
 Limited private sector participants with experience and rural domain knowledge
 Increasing demand for new cars from tier II & III towns
Ernst & Young viewpoint on Future of Auto Finance in India

We are witnessing a transition in the auto financing industry. A large number of public sector
banks have started to consider auto financing as a lending avenue. There has been an increase in
the number of captive finance companies owned by OEMs. Financers will be cautious in
selecting the credit profiles they want to include in their portfolio, and there is a general
tightening of lending norms. In the last six months, the Reserve Bank of India has reduced the
policy rates to ignite the growth and initial response has been positive. Once the economic
outlook starts brightening, availability of finance will also increase.
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Types of Auto Finance Services

Two-Wheeler Finance
Two wheeler finance market is on the growth path with increasing demand in semi-
urban and rural areas. The organised market of two wheeler in India is estimated to be
Rs 6,000-7,000 crore. So, a huge space exists for the two wheeler finance companies.
Previously there was a limited awareness about availability of two wheeler loans in the rural
areas but now the demand for those areas are picking up. These finance companies are
aggressively marketing their products with innovative service offerings and incentives.
The companies are aggressively marketing different auto loan schemes by offering innovative
and alluring offers to the customers. Today there are so many two wheeler finance companies
in India. These companies are either banks like HDFC ICICI, Bank of Baroda and Centurion
Bank of Punjab or private companies from non-banking sector.
Features of Two Wheeler Finance in India
Two wheeler finance is easily available with little documentation. The rates of interest are
reasonable in the Indian market hence the mass can easily get a bike financed.
 Up to 95% of the cost of the vehicle is financed.

 Flexible repayment options ranging from 12 to 48 months.
 The repayment is calculated upon monthly reducing rates.
 Repayment is made through post-dated cheques with easy EMIs.
Documents Required for Two Wheeler Finance
To get any two wheeler financed, certain amount of documentations are required. If the
documents submitted fulfill the criteria of the financing company, the loan is approved. The
basic documents required are as mentioned below.
 Application Form
 Passport size photographs
 Proof of income of last two years
 Proof of Residence
 Proof of identity
Car Finance
Be it the financing of a new car, or a used vehicle, finance companies offer plenty of
options for car financing. Car finance can be obtained from a variety of sources like
banks, credit unions, loan brokers, auto finance companies, etc.
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Features of Car Finance
 Banks pay upto 90% of the cost of the new vehicle.

 In case of used vehicles, banks finance up to a maximum of 85% of the value of the car.
 Generally public sector banks offer lower rate of interest than the non-banking finance
companies.
 Usually the interest is calculated on a monthly reducing balance.
 The banks offer repayment tenure of 12 to 60 months.
 Few institutions even offer 7 years repayment period.
 A salaried person can borrow up to 3 times of the annual salary.
 A self employed individual can borrow up to 6 times of the annual income.
Types of Loan
Loans up to 70-90% of the ex-showroom price and with flexible repayment tenors are provided
by various auto financers. The various finance schemes for Car finance are as follows:
Margin Money Scheme
 Finance for acquisition of new car upto 90% of the invoice value for certain models is
provided.
 Customer pays the margin money (invoice value minus the finance amount) to the
dealer directly. He also has an option to pay the margin money to KMPL upon which we
would release the entire invoice value to the Dealer.
 The financed amount can be repaid in 12 - 60 months EMIs.
Step Up Scheme
 Increase in EMI after every year, six months or quarter (depending upon customers
needs)
 Best suited for people who want the luxury car experience
 Payments made in line with customers growing income (starting with low EMIs in the
early period of repayment)
Low EMI, Balloon Scheme
 10%-25% of the cost of the car to be paid as last EMI

 Reduced EMI for the entire tenure
 Best for customers who want to dispose off their vehicle at the end of the tenure and
are looking at affordable EMIs during the tenure
Advance EMI Scheme
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 Payments of a few monthly installments is made upfront

 Balance is payable through EMIs
 Loan repayment is much faster with the advance installments
Documents Required
 Application Form
 Photographs
 Proof of income of last two years
 Proof of Residence
 Proof of identity
Loan Process
Car loan process involves a lot less paperwork than a home loan since the bank does not have
to verify any asset as in the case of home loans. It takes about three to six days to get a car
loan. Here is a step-by-step break-up of the car loan application process:
Step 1: Enquiry with a lender:
The customer gets in touch with as many lenders as possible and gets to know their loan offers.
Then he negotiates with them to get the best interest rate, checks if there are any special
offers. After which, the customer selects the best lender based on the information provided.
Step 2: Documents Collection
After customer finalizes the lender, the lender's direct selling agent visits the customer and
collects documents supporting proof of income, residence proof, and identity. Customers are
also required to produce copies of IT returns, salary slips, bank statements, passport, driving
license, and other relevant documents. These requirements vary from lender to lender.
Step 3: Field Investigation Agency Representative Visit
After submitting the documents, a field investigator visits the customers’ home to double check
the facts provided in the documents, such as place of residence, tenure at work place, and so
on. It is essential that the customer is present during this visit to clarify any query that the
investigator might have. Otherwise, the investigator might not get all the facts clearly and could
report that the facts provided do not actually add up - thus forcing the lender to reject the loan
application.
Step 4: Loan approved
Once the lender is satisfied with the veracity of your documents, the loan is approved. The
lender then disburses the amount through cheques or demand drafts (DD).
Commercial Vehicle Finance

Commercial vehicle finance or commercial vehicle hire purchase is done through banks
and non-banking finance companies (NBFCs). These companies finance new vehicles as
well as used ones. Usually they have tie-ups with the manufacturers to provide fast and
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easy loans to its customers. The terms and conditions differ from one company to other.
Commercial Vehicles includes buses, trucks, tempos, tippers, LCVs (light commercial vehicles,
HCVs (heavy commercial vehicles), MCVs (medium commercial vehicles) and three wheelers.
Features of Commercial Vehicle Leasing
 The value of the vehicle is assessed and finance is provided based on the value.
 The vehicle should be in the name of the customer.
 Proper comprehensive insurance cover is mandatory.
 Early closure is allowed.
Eligibility
 Any individual / partnership firm / company with more than two years of business
experience
 Existing owner of at least two commercial vehicles
 Captive customers and transporters
Types of Loan
These loans are also available for the first time buyer and the rate of interest depends on the
period of loan, borrower's credit history, and whether vehicle is new or not. There are
basically, 2 methods of heavy vehicle financing:
 Direct financing, where the borrower applies to a bank or any lending institution.
 Indirect financing, where the borrower avails loans from dealers.
Commercial or Heavy Vehicle loans can be availed by borrowers having bad credit history too
through online lenders as well as the traditional lending institutions, but they have to pay a
higher rate of interest. A truck financing scheme is known to be the most common heavy
vehicle scheme given by banks.
Some of the norms of truck loan have been mentioned below:
 Margin - Repayment within 36 months - 15 percent of vehicle on road cost Beyond
36 months till 5 years - 25 percent of vehicle on road cost
 Rate of Interest- Current prime lending rate: 13 percent p.a Repayment term within
36 months - prime lending rate is 11 percent p.a. Repayment term above 36 months
- prime lending rate is 12 percent p.a.
 Processing charges - Rs. 500
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Dealer Finance
Types of Loan
The various financial options available are:
 Inventory Funding
 Project financing – Term Loan
Auto-Finance companies also offer value added services such as:
 Dealer Financial restructuring

 Specific advisory services to Dealers
Inventory Funding Options
Inventory funding is available to auto dealers to finance the working capital requirement:
Retail Linked Trade Advance: Dealer inventory funding facility is linked to retail business
sourced through dealership counter. It is unsecured / semi-secured advances. Generally the
exposure is capped at Rs.1 crore, based on the dealer's working capital requirement and credit
assessment.
Wholesale Finance Facility: is semi-secured advance available to automobile dealers and is linked
with Retail Business. The maximum exposure under this is Rs.5 crore, based on the dealer’s
working capital requirement and credit assessment.
Floor Finance / Single Payment Gateway Plan: Caters to the entire working capital
requirements. The facility is similar to cash credit / overdraft products of banks. The credit
exposure is based on the dealer’s working capital requirement and credit assessment.
Term Loan Options
Term Loan is available to automobile dealers for setting up of new dealerships, expansion /
renovation of showroom / workshop / supplementing working capital requirement.
Equipment Term Loan is available to automobile dealers for purchase of equipments for their
service centre.
Amortizing Term Loan is available to automobile dealers for purchase of property for business
expansions / new dealerships.
Working Capital Term Loan is available to automobile dealers to fund core working capital /
supplement the working capital requirements.
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Documents Required for Dealer Loan Finance
 Brief background of promoters and details on existing business entities

 Last 3 years ( 5 years for Term Loan) audited financial statements
 C.A. certified Net worth statement and ITRs of promoters
 Dealership infrastructure details
 Current limits with banks / financiers with a copy of the sanction letter
 Sale numbers (past 12 months model wise)
 KYC (Know Your customer) documents
 Memorandum and Articles of association / Partnership deed
Market Indicators
Trend of Down Payment Proportion and Loan Length
As indicated in Table 5, the average Loan to Value of Vehicle Ratio in year 2006-07 was 72%, in
year 2007-08 was 70% and in 2008-09 was 72%. In 2006-07, the loan length of 56% of the
contracts was more than 3 years whereas in 2007-2008, 71% of the contracts had a loan length
of less than 3 years. The trend continued in 2008-09 with 73% of the contracts having loan
length of less than 3 years (Table 6).
Table 5: Loan to Value Ratio (LTV) Trend
Year LTV
2006-07 72%
2007-08 70%
2008-09 72%
Table 6: Proportion of contracts upto 3 years & >3 years
Year Upto 36 months 37-60 months
2006-07 44% 56%
2007-08 71% 29%
2008-09 73% 27%
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Auto Consumption Credit Balance Growth vs. Industrial Output Growth

In comparison with CAGR of 8.74% in Industrial Output during 2003-08, the auto finance
sector for Two-Wheelers grew at 7%, for Passenger Vehicles (PVs) at 18% and for Commercial
Vehicles at 24% during the same period. Robust growth of industrial activity and easy availability
of finance during this period led to high growth of auto financing for commercial vehicles.
Table 7: Comparison of CAGR of Auto Finance and Industrial Output
CAGR of Auto Finance (FY03-08) Two-Wheeler 7%

PVs 18%
CVs 24%
CAGR in Industrial Output (FY03-08) 8.74%
Source: SIAM, CRIS INFAC and Economic Surveys for various years
Auto Finance Proportion in Bank Credit

(In Rs. Crores, 1 Crore=10 millions)
As shown in Table 8, in year 2006-2007, of the Gross Bank Credit of Rs. 18,48,187 Crores,
7.21% was of Auto Loans and other personal loans. The auto and other personal loan
receivable increased to Rs. 1,68,795 Crores in 2008-2009, which was 6.415 of the Gross Bank
Credit.
Table 8: Auto Finance Balance Proportion as a %age of Gross Bank Credit
Year Gross Bank Credit Auto and Other Personal

(Food + Non-Food) Loans Proportion (%age of
Gross Bank Credit)
2006-2007 18,48,187 1,33,361 (7.21%)
2007-2008 22,47,289 1,50,658 (6.7%)
2008-2009 26,48,501 1,69,795 (6.41%)
Source: RBI Report on Trends and Progress of Banking in India, 2009
Bad Debt Ratio of Auto Finance Business

According to analysts, non-performing assets, or NPAs, in the new car loan segment is about 2-
3%. But NPAs in the commercial vehicle segment could be as high as 8% for some banks. Table
9 provides average percentage of NPAs in Auto Finance Industry in the Car and
Commercial Loans segment.
Table 9: NPAs in Auto Finance Industry
Year Car Loans CV Loans
2006-07 2.3% 4.0%
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Year Car Loans CV Loans
2007-08 2.7% 4.7%
2008-09 3.0% 6.0%
Source: CRISIL
Ratio of Monthly Payment and Income, Ratio of Car Price and Income
The candidate applying for the loan must have a minimum annual income of Rs 60,000.
However, this may vary slightly with different loan providers. In case of State Bank of India, loan
is available is up to the range of 2.5 times of net annual Income of an individual. The minimum
income cap of any individual should be Rs. 75,000 per annum. Another Bank, UTI Bank is
offering Loans which cover 85% of the vehicle's cost plus insurance and registration charges. It
has another scheme in which the Loan is offered at 20 times your monthly net salary. Loan can
be repaid in a maximum period of 5 months.
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IV. Auto Finance Companies in India

Overview
Various car finance companies exist all over the world. In a developing country like India,
various Non Banking Financial Companies (NBFCs) and Banks are working as Car Finance
Companies. NBFCs include financing companies set up by auto manufacturers themselves.
The various auto finance companies in India include State Bank of India (SBI), ICICI Bank, UTI
Bank, HDFC Bank ltd, Ford Credit Kotak Mahindra Ltd., Kotak Mahindra Primus Ltd., The
Financial Services Company of Fiat, Citibank, Bajaj Auto Finance Ltd, Tata Motor Finance, The
Saraswat Co-Operative Bank Ltd., Citicorp Maruti, The Standard Chartered Bank-India,
Sundaram Finance, Tata Finance Ltd., and Associates Finance. The criteria for loans vary from
Bank to Bank and from institution to institutions which are functioning as auto finance
companies.
Top Auto Finance Companies in India

Banking Auto Finance Companies
We are witnessing a transition in the auto financing industry. Besides various private
banks, a large number of public sector banks have started to consider auto financing as
a lending avenue.
PSU banks such as SBI, Bank of Baroda, PNB, Canara Bank, Syndicate Bank, Bank of India and
Union Bank of India are jointly lending around Rs 1,000 crore every month in the Rs 1,800
crore auto loan market, while the private banks accounts for the rest.
Auto firms have increasingly been joining hands with public sector banks as they finance 85% of
a vehicle’s value. In contrast, private banks generally offer 70-75% of the value of a vehicle as
loan. Fig 9 lists the tie ups of some auto firms with banks for auto financing of their vehicles.
Table 10: Auto Firms and Banks Tie Up for Auto Financing
Auto Firm Tie up with Banks for Auto

Financing
General Motors State Bank of India, Bank of
Baroda
Hyundai Motors Indian Bank, Syndicate Bank
Mahindra and Corporation Bank, Bank of
Mahindra Baroda
Honda Seil Axis Bank
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Why customers are opting for PSU banks?
 PSU banks are offering lower interest rates

 These banks restrict their ticket size of loans and thereby mostly finance small cars,
which form around 76% of the total auto market.
 They have a wide reach in small cities and rural areas where there is growth.
Table 11 below provides an indicate list of the interest rates offered by some major banks in
India on new car loans.
Table 11: Interest Rates offered by some Banks on New Car Loan
Interest
Bank name 1 yr 2 yrs 3 yrs 4 yrs 5 yrs 6 yrs 7 yrs
Type
State Bank of Patiala Floating 11 11 11 11.25 11.25 11.5 11.5
Bank of Maharashtra Floating 10.75 10.75 10.75 11.25 11.25 11.25 11.25
10.5 - 10.5 - 10.5 - 10.5 - 10.5 - 10.5 - 10.5 -
Punjab National Bank Fixed 11.0 11.0 11.0 11.0 11.0 11.0 11.0
Central Bank of India Floating 10 10 10 11 11 11 11
9.75 - 9.75 - 9.75 - 9.75 - 9.75 - 9.75 - 9.75 -
ICICI Bank Floating 10.5 10.5 10.5 10.5 10.5 10.5 10.5
Bank of India Floating 9.75 9.75 9.75 10.25 10.25 10.25 NA
State Bank of
Bikaner Floating 10 10 10 10 10 10 10
SBI Floating 11.25 11.25 11.25 11.25 11.25 11.5 11.5
Allahabad Bank Floating 10.5 10.5 10.5 10.5 10.5 10.5 10.5
HDFC Bank Fixed 10.5 10.5 10.5 10.5 10.5 NA NA
10.5 - 10.5 - 10.5 - 10.5 - 10.5 -
Kotak Bank Floating 11.0 11.0 11.0 11.0 11.0 NA NA
Indian Overseas
Bank Fixed 11.5 11.5 11.5 11.5 11.5 NA NA
ABN Amro Fixed 15 15 15 15 15 NA NA
Corporation Bank Fixed 10.5 10.5 10.5 11 11 11.25 11.25
Oriental Bank of
Commerce Floating 10.25 10.25 10.25 10.75 10.75 10.75 10.75
Dealer commissions are in range of 2-4%. Car loan rates given above are indicative in nature. It is based on
market research conducted by the Apnaloan Research Bureau.
Services and Product Types (Some Examples)

One of the largest Nationalized Banks in India, SBI (State Bank of India) is offering the benefits
like, Repayment periods up to 7 years and Low processing. However, no advance EMI needs to
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be paid with the down payment which effectively increases the amount of Loan. The method of
interest calculation is the Reducing Balance method which means at the time of Repayment, you
are paying interest which has been calculated on the remaining balance and not which has been
there at the start of the year. The Loan is available is up to the range of 2.5 times of net annual
Income of an individual. The minimum Income cap of any individual should be Rs. 75,000 per
annum. The Bank is sanctioning Loans for New Cars as well as old cars, which are not more
than five years old. People who do not have an account with this Bank can also avail Loans from
the Bank provided they produce relevant documents such as identity proof, address proof or
other necessary documents.
Another Bank, UTI Bank is offering Loans which cover 85% of the vehicle's cost plus insurance
and registration charges. It has another scheme in which the Loan is offered at 20 times your
monthly net salary. The Repayment of the Loan has to be done within 60 monthly EMIs or
within a maximum period of 5 years. The key features of the Car Loan which is provided by
UTI are 13% Interest rate on a monthly reducing balance basis, repayment period is maximum 5
years, check off facility is available in which installments are directly paid by the employer and
the full amount of the vehicle will be insured in the Bank's favor.
One of the largest private sectors Bank in India is ICICI Bank. In the Car Finance field, it is
offering predominantly competitive rates. The feature of providing the finance of this bank are
loans are available up to 95% in case of New Cars and 85% in case of old or second hand cars,
repayment period of the Loan is maximum 7 years and the option of car overdraft is available in
which 90% of the car value is given to you.
Case Studies
State Bank of India
State Bank of India (SBI) is one of the leaders in the auto finance segments in India. Recently it
has slashed down its rate of interest for the new cars, which, in turn, has attracted a number of
customers. Its long repayment option and extensive network of more than 12,150 branches
have also made it quite popular among the customers. In 2008-09, State Bank of India (SBI)
witnessed a 36% growth in Auto Loans with market share increasing from 10% to 12% in
respect of Auto Loans for new vehicles. Table 12 below provides details of distribution of
exposures of SBI bank as on 31st March 2009 for Automobiles and Trucks segment.
Table 12: Distribution of Exposures of SBI Bank as on 31.03.2009 (in Rs. millions)
INDUSTRY FUND BASED NON-FUND

[Outstanding-(O/s)] BASED(O/s)
Standard NPA Total
Automobiles & 88363.1 1090.5 89453.6 4062.2
Trucks
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Source: Annual Report 2008-09 of SBI Bank
 SBI became the largest financier of Maruti and Hyundai cars with penetration of more than
13% since October 2008.
 During the year 2008-09, the Bank also entered into an exclusive arrangement with TATA
Motors for handling the booking process of TATA “Nano” cars.
 SBI has launched on its web-site an on-line application form for registering Auto Loan
enquiries and expeditiously monitoring and converting these leads into Auto Loans.
ICICI Bank
ICICI Bank is amongst the top 10 auto finance companies in India. It has put car loans on fast
track. In the current financial year, ICICI Bank has doubled auto loan disbursement amount to
more than Rs 15,000 million, comparing to the last financial year (ended March 2009). The
following table 13 indicates the composition of ICICI Banks gross (net of write-offs) outstanding
auto finance portfolio. (Rs. in billion, except percentages).
Table 13: Composition of ICIC Bank Gross (net write-offs) Outstanding Auto Finance
Portfolio
March 31, 2008 March 31, 2009

Total retail % of total Total retail % of total
Advances retail advances advances retail advances
Automobile Loans 664.39 49.3 575.88 52.2
Two-wheeler Loans 29.81 2.2 16.91 1.5
Source: Annual Report 2008-09 of ICICI Bank
Kotak Mahindra Prime Limited (Kotak Mahindra Bank)
KMPL is into car finance, engaged in financing of retail customers of passenger cars and multi-
utility vehicles and inventory and term funding to car dealers. The company finances new and
used cars under retail loan, hire purchase and lease contracts.
The main streams of income for the company are retail income, dealer finance income and fee
based income. The company also receives income from loans against securities,
securitization/assignment transactions, purchase of NPAs, personal loans, corporate loans and
developer funding. The major expenses of the company are interest expense, business sourcing
expense and cost of running operations. During the Financial Year 2008-09, the company’s
retail vehicle disbursements were at Rs. 24,310 millions as against Rs. 29,030 millions in the
previous year. During the year under review, gross advances stood at Rs. 56,150 millions as
against Rs. 59,250 millions in the previous year. The Financial Year 2008-09 witnessed volatile
interest and increased interest rates being charged to the car finance customer. The pressure
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continued on maintaining the margins in the retail car finance business. The company is
continuing to focus on control over cost and credit losses, while maintaining its positioning in
the car finance market. The Gross Income of the company increased from Rs. 7,399.73 millions
in 2007-08 to Rs. 9,822.08 millions in 2008-09. Profit before Tax was at Rs. 2,432.1 millions in
2008-09 as compared to Rs. 1,546.32 millions in 2007-08, an increase of 57%. The credit loss
ratio of the company has been consistently maintained in the range of 0.33% to 0.69% over the
last three years in the car finance business. There have been certain instances of
misappropriation of vehicles or use of deception to obtain vehicle loans by some of the
customers involving an aggregate amount of Rs. 14.93 millions. The table 14 below provides
details of receivable under auto loans financial activity of KMPL.
Table 14: Receivables under Financing Activity (in Rs. Millions)

31st March 2009 31st March 2008
Secured – considered good
Hire Purchase – Vehicles .667 1.548
Loans – Vehicles 43,087.741 43,632.035
Lease – Vehicles 1,01.748 136.943
Secured – considered doubtful
Loans – Vehicles 99.274 47.174
Lease – Vehicles .007 .218
Source: Annual Report 2008-09 of Kotak Mahindra Bank
Non-Banking Auto Finance Companies

Companies other than banks come under the NBFCs category. However, we have dealt with
NBFCs established by auto manufacturers in a separate category.
The high growth in disbursements that NBFCs enjoyed during the earlier boom periods had
moderated largely due to the meltdown in the automobile sector. The fortunes of these
companies predominantly rested on the auto sector (commercial vehicle, two-wheeler, and
three-wheeler) which witnessed significant fall in volumes. Though there was slowdown in
disbursements, with falling interest rates these NBFCs managed a reasonable growth of 25 per
cent in their net interest income on an average, as the borrowing rates continued to fall more
rapidly than the yields made from lending.
Box 2: Loan Disbursements by Non Banking Auto Finance Companies
NBFC’s disbursements in September 2009 quarter were close to Rs 900 core, which is a
growth of 35 per cent over the June quarter and a growth of about 45-50 per cent over the
corresponding quarter last year.
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Cholamandalam DBS Finance, Sundaram Finance, M&M Financial Services and Shriram
Transport Finance, the prominent NBFCs, have aggregately seen net profit grow by 32 per cent
over FY08. The profit growth in 2006-07 over 2007-08 was 58 per cent. The profit picture may
look skewed due to much higher profit growth registered by Shriram (57 per cent). Barring
Chola DBS, none of the NBFCs have seen a decline in profit growth.
Why customers prefer NBFCs?
An official with Tata Motors Finance says that despite an interest rate difference of 2-3 per cent
between non-banking finance companies and banks, borrowers still prefer them. This is due to
an easier documentation procedure and flexible eligibility norms.
Case Studies
Shriram Transport Finance Company Limited (STFC)

STFC is India's largest player in commercial vehicle finance. It was established in the year 1979.
The company has a network of 479 branches and service centers.
Its products include, financing of pre-owned and new commercial and passenger vehicles,
construction equipment, tractors, 3 wheelers, multi-utility vehicles, among others. Shriram
Transport also offers finance for working capital, engine replacement, bill discounting, credit
cards and tyre-loans, to provide holistic financing support to customers. The table 15 below
provides the financial highlights of the company for the year 2008-09.
Table 15: Financial Highlights (2008-09) of Shriram Transport Finance Company Limited
Assets Under Management Rs. 2,32,810 millions (US$ 4.95 bn)
Total Income Rs. 37,311.3 millions
Net Profits Rs. 6,124.0 millions
Earnings Per Share Rs. 301.1 millions
Gross NPA 2.14%
Net NPA 0.83%
Auto Finance Services by India Auto Makers
Overview
The provision of finance from the major automobile financiers in the recent times has seen the
coming of Indian automobile market of its age. The market for both new and used vehicles too
has grown and buyers can opt for either depending upon the needs. The facility of financing by
the major automobile financiers has acted as a catalyst to the growth of the automobile sector
as a whole, contributing to the overall economic growth and prosperity of the country.
30
Indian auto companies such as Tata Motors, Mahindra & Mahindra and Bajaj Auto have become
more aggressive in lending through their finance arms. Hero Honda, the market leader in the
motorcycle segment, has been scouting for a joint venture partner to foray into the financing of
its bikes.
Market leaders Maruti and Hyundai have all these years depended on public sector bank funding
of consumer auto loans. International banks and NBFCs too have had a modest share of the
business. But with slackening auto sales, caused by the liquidity crunch and high interest rates,
auto majors are eager to set up captive finance divisions to boost sales
Services and Product Types

The terms, conditions and overall financing criterion varies from one automobile financier to
another, depending upon the duration of payment, the borrower and the model of the
concerned automobile. Innovative offers are being given to customers who want to opt for
automobile loans.
Case Studies
Tata Motorfinance Ltd.

Tata Motorfinance (TMF), the auto financing arm for Tata Motors, came into existence in June
2003. This was a common front-end, jointly formed by BHPC (Bureau for Hire Purchase and
Credit) of Tata Motors and the asset financing arm of Tata Finance. Subsequently Tata Finance
was merged with Tata Motors and in April 2005 TMF became a division of Tata Motors.
In the year 2008-09, TMF financed 1,53,007 new vehicles, a decline of 13.8% over 1,77,437 in
the year 2007-08. TMF disbursed Rs. 74,150 million, a decline of 22.9% over Rs. 96,200 million
in the year 2007-08. During the year 2008-09, TMF extended support to the Company's vehicle
sale by financing 32.9% of the total domestic sales, compared to 33.6% in the previous year.
TMF is on course to become a strong captive financing arm to support the vehicle sales
business as well as to de-risk the cyclical revenue stream of the vehicle business. The extensive
network of TMF will also complement the dealer network of vehicles sales, thus widening the
reach of the Company.
In the Commercial vehicle financing, TMF achieved a market share of 35.8%, with total
disbursements of Rs.52,000 million (previous year Rs. 63,000 million), recording a decline of
17.4% and financed 94,882 units, a decline of 11.9% over the year 2007-08. In the passenger
vehicle financing segment, TMF achieved a market share of 29%, with total disbursements at Rs.
18,070 million (previous year Rs. 22,280 million), recording a 18.9% decline and financed 58,125
units, a decrease of 16.7% over the previous year.
The book size at the end of March’09 for TMFL stood at Rs. 54 billion. NIM of vehicle financing
business was ~ 4.6%. Financial performance of TMFL was impacted by higher provisions for
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NPAs, which continue to be more conservative than as per the norms of Reserve Bank of India.
The table 16 below provides details of the annual results of TMF for the year 2008-09.
Table 16: Annual Results (2008-09) of Tata Motor Finance (In Rs. millions)
Share Capital 8500.0

Reserves and Surplus 4368.5
Total Assets 71704.7
Total Liabilities 58836.2
Turnover 9109.3
Profit/ (Loss) before Tax (1619.0)
Tax Expenses/ (Credit) (412.0)
Total Profit/(Loss) after Tax (1207.1)
Bajaj Auto Finance Ltd.

Bajaj Auto Finance Limited (BAFL) with assets under finance of Rs. 35,437 million is one of the
premier non-banking finance company (NBFC) in the country. It offers a diverse array of
financial products to its clients ranging from two wheeler loans to other loans like consumer
durable loans, business loans and many more. It has an extensive network of 50 branch offices
and more than 6000 consumer durable dealerships. BAFL also offers free personal accident
insurance to its clients and a free extended warranty on all Bajaj Two Wheelers that it finances.
In the year 2008-09, BAFL deployed two- and three-wheeler loans of Rs. 7,827.6 millions as
against Rs. 14,843.7 millions in the year 2007-08. Around 25 per cent of Bajaj Auto sales are
being financed by Bajaj Auto Finance Ltd (BAFL).
Ashok Leyland Finance Ltd.

Ashok Leyland Finance (ALF) was floated by the Hinduja group and has now been merged with
IndusInd Bank. ALFL had assets of over Rs. 30,000 millions, a client base of 500,000 and a large
network of offices spread across the country. Since the company is now merged with IndusInd
Bank, the financial details of Ashok Leyland Finance are not available.
However, according to the annual report of the company for year 2008-20009, the company
plans to return to non banking finance business to fund commercial vehicles, towards which a
new company, Hinduja Leyland Finance Ltd., has been formed. Operations have commenced in
2009-10. The new company would fulfill the needs of the company’s customers, particularly in
regions, where affordable financing options are not easily available.
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Auto Finance Services by Foreign Auto Makers
Business Strategies and Product Types

International auto majors, who have been speeding into the rapidly growing Indian
automobile market in recent years, are trying innovative strategies to expand market
share and boost sales. Many are now setting up finance subsidiaries that offer loans to
consumers, institutional buyers and even dealers. International auto manufacturers,
including Volkswagen, Mercedes, BMW and Toyota – all with significant operations in
India – have decided to set up their own financing arms here to provide a fillip to sales.
German auto major Volkswagen, for instance, recently set up Volkswagen Finance Pvt. Ltd, a
fully-owned subsidiary, to offer financial products not only to the consumer, but also to its
channel partners, including working capital for its dealers. The new subsidiary will also cater to
consumers and dealers buying or selling other group brands, including Volkswagen commercial
vehicles, Audi and Skoda models. It will also tie up with other domestic financial institutions and
insurance companies to increase market penetration. The German auto major is investing
US$730 million in a new plant – with a capacity of 110,000 vehicles per annum – near Pune. The
company will also begin importing light commercial vehicles over the next few months. The
new finance firm –which could be upgraded to a non-banking finance company (NBFC) later –
aims to capture a 10 per cent market share in due course.
Skoda Auto, part of the VW Group, which has done extremely well in India, is leveraging its
Volkswagen connection and has announced a tie-up with Volkswagen Finance to offer loans to
potential buyers. The company will include insurance and maintenance in the loan package and
also do away with the initial down payment to those opting for a car loan from the new
subsidiary.
Another German company, Daimler Auto, which is in the high-end commercial vehicles
segment, is planning to set up Daimler Financial Services to help sell its premium range of
commercial vehicles, almost 90 per cent of which are sold through auto finance. Daimler has
set up a 60:40 joint venture with Hero Motors, called Daimler Hero, for the manufacture of
commercial vehicles. The new plant near Chennai, with an initial capacity of 70,000 units, will be
ready by next year. Daimler AG is the parent company of Mercedes-Benz, which believes that
having a finance arm helps since it is flexible unlike banks, and helps in trades and swaps.
Daimler’s main rival in the commercial vehicles segment, Volvo India, is also considering setting
up its own finance arm. With a target of selling 100,000 trucks by 2015, the company feels that
the combination of high interest rates, high steel prices and capped freight rates could hit the
company and industry quite hard. Consequently, the company feels that it will be able to offer
more consistent interest rates to consumers with its own financial services subsidiary. Other
33
than finance, the company would also provide operating lease contracts, insurance and
maintenance contracts. Volvo has a US$225 million joint venture with Eicher Motors Ltd –
called VE Commercial Vehicles – besides its own existing plant to manufacture trucks and
buses.
Japanese auto major Toyota Motors– now the world’s largest car manufacturer– is also
examining the possibility of setting up an in-house finance company. The company plans to
launch its small car in India in 2010 and is looking at volume sales. An auto-loan division would
help it drive sales.
American auto-makers have had a mixed experienced in the auto financing business in India.
General Motors, which also sells its Chevrolet brand in India, shut down its retail lending
operation, a joint venture of GMAC (formerly known as General Motors Acceptance
Corporation) with a local partner, last year. Chrysler has plans to enter India, though it has not
firmed up any partnerships so far. The US government has been extending funding to the retail
lending arms of both GM and Chrysler.
Similarly, in France, the government has extended credit to the finance arm of Renault, though
in India the French firm does not have a separate retail lending division.
Automobile industry analysts feel that auto sales in India suffered a setback in the last quarter of
2008 following the credit squeeze, with banks refusing to extend loans to buyers. But with the
Reserve Bank of India, the country’s central bank slashing interest rates to encourage the off-
take of auto and consumer loans, rapid growth has been witnessed in the auto sector. And with
leading international firms planning to launch a series of new models in the current year, many
are looking into the prospect of funding auto loans through their own subsidiaries.
Sources of Finance for Auto Finance Companies

On basis of Investor Profile
 Mutual Funds
 Insurance Companies
 Banks
 Others
On basis of Instrument
 Bonds
 Securitisation
 Commercial Papers
 Fixed Deposits
34
 Banks
Fig 5: Sources of Finance (Case of Mahindra Finance)
Auto Finance Services Risk Management Measures

Following are some of the measures used by auto fiancé companies to manage risks:
Credit and Collection
Credit and collections are important facets in Auto finance business. All applications for car
loan go through the credit appraisal process, which is detailed as follows:
 All applications along with income documents and Field investigation reports are
appraised by qualified, trained and experienced credit officers
 The five criteria considered at time of credit decision are Character, commitment,
capacity, collectability and consistency.
 Apart from income docs which customer gives and field investigation verification done
thru external agency, track records of other finance companies, CIBIL bureau report,
CIBIL bureau score, and generic scores based on internal score cards are also taken into
consideration while taking decision on loan sanctions
 The entire process is driven by well defined policies and process notes which also cover
deviation and escalation matrices.
Post loan sanction, delinquency is monitored through various activities like infant analysis, pre
loss analysis, portfolio and risk reports given by risk department. Policies, processes, products
and credit buying patterns are altered and refined based on these analyses.
35
Collection Procedure
Collection efforts are directly correlated to the aging of the loan account i.e. 30+, 60+, 90+ etc.
Collection efforts are applied proportionately to the delinquent status of the account. The
following are currently various methods employed for collections recovery:
 Telecalling
 Field collection by own staff or external collection agency
 Legal Action for Repossession
Following are some of the measures, which may be followed to measure overall risk in auto
finance business:
 Increase presence in the Rural and semi urban markets

 Develop a Strong Capital Base
 Have Extensive Branch Network / Dealer Relationships
 Have strong Client Base
 Develop strong linkages with auto manufacturers
 Have Prudent loan approval and administration procedures
 Borrow at competitive rates
 Have Experienced Board and executive management team
Securitization of Auto loans

Securitisation is the process of conversion of existing assets or future cash flows into
marketable securities. In other words, securitisation deals with the conversion of assets which
are not marketable into marketable ones.
In India, the auto sector has been thrown open to international participation, greatly expanding
the scope of the market. Auto loans (including installment and hire purchase finance) broadly
fulfill the features necessary in securitization. The security in this case is also considered good,
because of title over a utility asset. The development of a second hand market for cars in India
has also meant that foreclosure is an effective tool in the hands of auto loan financiers in
delinquent cases.
Citibank Case
Citibank assigned a cherry-picked auto loan portfolio to People’s Financial Services Ltd. (PFSL),
an SPV floated for the purpose of securitisation by paying the required amount of stamp duty
(0.1%) to ensure true sale. This is a limited company and can act only as SPV for asset
securitisation. This SPV is owned and managed by a group of distinguished legal counsels. PFSL
then proceeded to issue ‘Pass Through Certificates’ to investors. These certificates were rated
by CRISIL and listed on the wholesale debt market of the National Stock Exchange (NSE), with
36
HG Asia and Birla Marlin as the market makers. Global Trust Bank acted as the Investors’
Representative. Citibank played the role of servicer. The certificates are freely transferable and
each of the transfer will have a stamp cost of 0.10%.
The coupon of the security was high in spite of good quality of the underlying asset portfolio,
because investors expected a premium to compensate for their unfamiliarity with the
certificates. The investor base was limited mostly to MFs. FIs were hesitant because of the
unsecured nature of the instrument and the absence of clarity on whether the certificates could
be treated on par with other debt securities in their investment policy. Although the certificates
were listed on the NSE, there was very little secondary market activity because there was
absence of adequate amount of alternative security of similar risk profile.
Besides Citibank, NBFCs like Ashok Leyland Finance, 20th Century Finance etc. have securitised
their auto loan portfolio, though, of course, these transactions involved assignment of
receivables only and not issuance of securities. The asset portfolios were bought by one or two
large institutions. TELCO has also reportedly sold over Rs 550 crore of its auto loan portfolio
in multiple tranches through this route.
37

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Beiqi Foton Auto Co. LTD - India's Auto Finance Market Overview

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Jan 2010

Beiqi Foton Auto Co. Ltd.

India’s Auto Finance Market

India China Economic

II. Government Policy and Regulation................................................................................. 6

Conditions for Establishing Auto Finance Company in India .................................................. 7

III. Status of Auto Finance Market in India .................................................................... 11

Future Prospects ...........................................................................................................................15

Types of Auto Finance Services ..................................................................................................17

Market Indicators ..........................................................................................................................22

IV. Auto Finance Companies in India .............................................................................. 25

I. History of Auto Finance in India

Auto Sales vs. Auto Credit Balances Growth

Table 2: Domestic Sales Trend of Automobiles in India (‘000)

Domestic Sales Trend of Automobiles in India (‘000)

II. Government Policy and Regulation

Table 3: Contribution of auto sector to GDP (in %)

Regulatory Body for Auto Finance Sector

Conditions for Establishing Auto Finance Company in India

Following is an indicative list of documents/information to be furnished along with the

11. Net owned fund as on date.

Conditions for Establishing Financial Leasing Company in India

Conditions to Apply for Issuance of Financial Bonds

III. Status of Auto Finance Market in India

Fig 1: Timeline: India's Automotive Industry

(Source: Automobile Industry Presentation by India Brand Equity Foundation)

Fig 2: Global Major Auto Players in India

(Source: Automobile Industry Presentation by India Brand Equity Foundation)

Fig 3: Indian Auto Firms Partnerships with Foreign Auto Firms

Automobile Industry Sales in 2009

Auto Finance Industry

As in many other markets, a majority of vehicles – two-wheelers, passenger cars and

Fig 4: PV Finance market in India (FY03 to FY08)

Source: CRIS INFAC

Box 1: Disbursement of Auto Loans in September 2009

Auto Finance Industry

Key drivers for growth of Auto finance sector in India:

Ernst & Young viewpoint on Future of Auto Finance in India

Types of Auto Finance Services

Features of Two Wheeler Finance in India

 Up to 95% of the cost of the vehicle is financed.

Documents Required for Two Wheeler Finance

Features of Car Finance

 Banks pay upto 90% of the cost of the new vehicle.

Margin Money Scheme

Low EMI, Balloon Scheme

 10%-25% of the cost of the car to be paid as last EMI

Advance EMI Scheme

 Payments of a few monthly installments is made upfront

Commercial Vehicle Finance

Features of Commercial Vehicle Leasing

The various financial options available are:

Auto-Finance companies also offer value added services such as:

 Dealer Financial restructuring

Inventory Funding Options

Term Loan Options

Documents Required for Dealer Loan Finance

 Brief background of promoters and details on existing business entities

Table 5: Loan to Value Ratio (LTV) Trend