By Namit Jain
Imagine walking into a used car dealership with Rs 30,000 in disposable savings in your bank account and walking away with a 2015 Swift VDi of your choice on a same day loan. Is it possible to buy a used car on financing? What loan would you get? Would you be able to compare loan options? How quickly would the money get into the bank account? Will it be an easy experience? These questions are likely to emerge in your mind when purchasing a used car finance today.
The used car, in fact, is the least penetrated auto finance category in India to date. Out of 10 new cars sold today, 7 are financed while there are only 2 in the case of used cars. This contrasts sharply with a developed market like the United States where nearly 55% of used cars are sold on finance. Finding and applying for a loan for used cars is a complicated and lengthy process in India. It takes more than 10 days on average to get a loan, resulting in a higher cost of working capital for a used car dealership and a poor shopping experience for consumers. Fast forward to 2021, used car finance is expected to become one of the largest retail finance segments with $ 10 billion in annual personal loan volumes. What will drive this change? Let’s discuss 5 mega trends that will cause a bigger disruption in this industry than many observers assume today.
1. Supply creates demand: The used car is the classic example of an industry where supply creates demand. With booming parking supported by rapid growth in new car sales and a decline in average car ownership time to 5 years, India is expected to see a 10 million used car supply of quality by 2021. As the underlying market grows, used car retail finance is conveniently in balance for natural growth itself.
2. The most fun: Several banks and non-bank financiers have entered the used car segment in recent months, including the main two-wheeler financiers (Capital First & Hero FinCorp), the big banks (Yes Bank) and the new NBFCs (Clix Capital ). These new players are likely to bring innovations in loan products, better risk coverage in all consumer segments and process efficiency contributing to greater depth of financing in used cars.
3. Walk at a different pace: The litmus test of an underwriting model is not just the quality of the portfolio, but three other things: speed, breadth and simplicity. Not at the expense of each other. In many ways, the used car is a unique segment of consumer credit. Compared to the bicycle or the sustainable consumer (CD), a similarity exists in terms of a reasonable share of profiles of first-time credit seekers, but the level of exposure is 8 to 10 times higher on the used car ( the average used car loan is Rs 300,000 while the CD is Rs 30,000). Compared to the business loan (BL), a similarity exists in terms of a higher mix of freelance profiles, but the existing credit lines of used car seekers are 70% lower than that of a typical BL applicant. While expanding the existing Bike or PL decision engines was a starting point, lenders need to introduce richer underwriting models specific to the consumer character of this segment.
4. Go “digital” in a much more complete way: Even the best auto finance experience today can only be called “semi” digital. The industry has certainly evolved over the past 2 years in terms of digital channel strategy. From ‘online lead generation’ to ‘online to offline fulfillment’ approach, from instant ‘loan offers’ to instant ‘soft approvals’. What banks need next is an integrated digital strategy. Banks need to reimagine the consumer’s journey from pre-connection to connection, decision-making, disbursement and post-disbursement as an end-to-end digital journey with the fewest pauses or physical interjections possible. India Stack is an essential catalyst, but not sufficient leverage. Digital automotive players with strong expertise in distribution, fintech and verticals will produce the next disruption in this space.
5. Be smart about “systemic” challenges: There are two unique challenges in the used car finance segment – asset valuation risk and asset title risk. Since every used car is unique, banks must assess its quality and market value to decide on the loan value. Second, since a used car sale involves a change in ownership, until the car registration certificate is endorsed to the new buyer and mortgaged to the lender, the lender has no well guaranteed for recourse. In our country, this process takes an average of 45 days, or even more than 180 days in some cases, and also carries risks of fraud. Banks need to reduce the risks associated with these systemic challenges and find a workaround to these time-consuming complications. Reducing reliance on unorganized local agents and adopting centralized asset inspection or title risk management capabilities of automotive fintech players will likely be the way forward.
As the used car finance segment is poised to experience natural growth as the underlying market expands, it would take significant fundamental changes in the ecosystem to achieve $ 10 billion growth. by 2021. With innovations in decision engines, lending products, distribution channels, automation workflow and risk management, ‘same day‘ used car lending does not will not be as remote a possibility as it seemed at the start of our imaginative journey.
(The author runs the used car finance business vertical on CarDekho.com. Opinions are personal)