The Vehicle Finance market in India is estimated to be around INR 3 Trillion. The market is comprised of commercial vehicles, private vehicles, agricultural vehicles, and two wheelers. While Banks have been active in the organized segment, the unorganized segment remains untouched due the borrower’s limited banking habits and their inability to provide formal employment contracts, income proofs, and a lack of repayment track record with formal financing institutions.
The market for used commercial vehicles is estimated to be around INR 1000 billion. Despite the opportunity, banks have stayed away from the segment due to the complexities involved – high cost of delivery, understanding of local geography and the perceived high risk in the informal sector. About 55% of this market is served by money lenders/ private financiers and 45% of this market is served by formal sources. While this market is dominated by very large NBFCs, there are a large number of small NBFCs which operate in the segment and have limited or no access to debt capital markets. The used commercial vehicle market is driven by the aspirations of driver turned owners, first time users and first time buyers and small road transporters. Typical end clients come from low income households who have limited access to formal sources of financing and whose livelihood is directly dependent on the vehicle.
Two-wheelers cater to the needs of low and middle income users in rural and urban India and help fill the gaps when public transport systems are inefficient, not integrated, or non-existent. NBFCs focused in this segment have developed products to provide financing for purchase of two wheelers by self-employed customers like small traders, suppliers, shop keepers with good credit profiles, and to salaried employees, usually taking up their first job in the organized sector.
IFMR Capital Partners in Vehicle Finance
IFMR Capital has partnered with high quality originators in the vehicle finance space who have identified their own asset niche in the sector and developed highly relationship focused business models to cater to the financing needs of the informal segment. The senior management across the Originators has developed a deep understanding of the geography and the vehicle segment they operate in, in most cases with a vintage of more than 15 years.
One of the important factors in the origination model is independent and separate business and credit functions. In the used vehicle segment the Originators have developed in-house valuation matrices for valuation of different model-makes of vehicles. This is also supported by independent vehicle valuation. While the cash-flow analysis is limited as most of the vehicles in the segment operate on market load and do not have formal employment contracts, the repayment capacity is based on the Originator’s understanding of the vehicle and it’s earning capacity in the market it operates in.
The borrowers in the informal segment are highly vulnerable to external shocks and pressures. Most of the delay in the vehicle finance segment is situational in nature and does not lead into ultimate default. Originators have thus developed relationship focused collection models with an objective to remain in constant touch with the borrower and keep abreast with the related issues and devise the collection strategy accordingly.
Portfolio quality of IFMR Capitals partners has been consistently in line/ superior in comparison to the industry. The standardised origination, collection and delinquency management processes have resulted in improvement from PAR>0 to PAR>90 to PAR> 180.
The AUM of commercial vehicle partners of IFMR Capital varies widely. Most of the clients have AUM of less INR 500 crore, where there are a couple of clients with AUM more than INR1000 crore. The asset class has witnessed significant equity interest from a variety of investors: such as Banyan Tree Growth Capital, MotilalOswal Private Equity, Everstone Capital Advisors.
The long-term prospects of the sector continue to be supported by expectation of improvement in economic growth, increasing pace of investments in highway & road infrastructure and structural changes like implementation of emission & anti-overloading norms supporting the demand in favour of trucks. Increase in rural and urban disposable income is expected to support the two wheeler segment. IFMR Capital expects significant growth in existing partners and the addition of new partners in the asset class.