Vehicle financing to reach Rs 8 lakh crore in next fiscal: CRISIL predicts steady growth

As of March 31, 2023, CVs dominate the industry, constituting approximately 50% of the vehicle financing assets under management (AUM).

In a recent analysis, CRISIL Ratings forecasted that vehicle financing assets managed by non-banking financial companies (NBFCs) are set to cross the Rs 8 lakh crore mark by March 31, 2025. This projection indicates a substantial increase from the Rs 5.9 lakh crore recorded as of March 31, 2023, with a compound annual growth rate (CAGR) of approximately 17%.

The positive outlook is supported by the expectation of continued improvement in asset quality, attributed to sustained macroeconomic activity. Despite a recent increase in borrowing costs, profitability is anticipated to remain stable, driven by diminishing credit costs. However, a potential compression in net interest margin (NIM) is also on the horizon.

The growth trajectory is fueled by increasing demand for commercial vehicles (CVs), cars, utility vehicles (UVs), and two-/three-wheelers. Furthermore, the government's emphasis on infrastructure spending is expected to contribute to the surge in financing activities.

As of March 31, 2023, CVs dominate the industry, constituting approximately 50% of the vehicle financing assets under management (AUM). Cars and UVs follow closely at 29%, with two-/three-wheelers at 11%, and tractors at 10%. This segment-wise distribution highlights the contribution of diverse segments to the overall growth in vehicle financing.

According to Ajit Velonie, Senior Director at CRISIL Ratings, "CV finance is expected to grow 12-14% per year over fiscals 2023-25, driven by growth in end-user industries such as cement, steel, and consumer durables. Because of increased premium model sales and the large-scale replacement volume projected for two-wheelers, financing of cars/UVs and two-/three-wheelers would also witness substantial growth of 23-25% per year. Tractor financing will develop at a slower rate of 8-10% per year as a result of the erratic monsoon."

The growth in Assets Under Management (AUM) has been boosted by the increasing popularity of used vehicle financing, driven by rising prices of new vehicles. The share of used-vehicle financing has surged to around 40%, up from approximately 33% over the past four years, with an impressive Compound Annual Growth Rate (CAGR) of nearly 13%.

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In contrast, new vehicle financing has seen a CAGR of around 4% during the same period. This shift in preference has contributed to the overall expansion of AUM. In addition to AUM growth, the credit profiles of vehicle financiers have benefited from a consistent enhancement in asset quality since the previous fiscal year.

"Given the strong correlation of asset quality with overall economic activity, the overall 90+ days past due should improve by nearly 50 bps to 4.2% this fiscal and sustain at a similar level next fiscal. While improvements are predicted across segments, asset quality in the tractor category will need to be regularly monitored because it is dependent on monsoon patterns, agriculture production, and rural activity," said Malvika Bhotika, Director, CRISIL Ratings.

An analysis of CRISIL-rated vehicle financiers, representing over 90% of the sector's AUM, reveals a positive trend, with the overall 90+ days past due (dpd) metric improving by approximately 120 basis points to reach 4.7% in the last fiscal year.