What is a Captive Insurance Company? - Active Captive Management
10 commandments of captive auto financing in India - EY
Transcript of 10 commandments of captive auto financing in India - EY
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The Indian auto and auto finance industry is steadily moving toward recovery
Auto financing market in India – Point of view
Improving socio- economic
environment
► Current Account Deficit declined from a peak of 6.7% of GDP (in 3Q, 2012–13) to an estimated 1% in 2014–15, 26% growth in FDI in 2015
► 10% growth in disposable incomes, 2/3rd of Indian population in working age
GDP growth projections FY16 7.5%
1
Turnaround in auto industry
The Indian automotive industry is moving on its path of recovery, and is expected to gain further impetus in the medium term, mainly driven by:
► Economic growth ► Reduced fuel prices ► Government’s focus on road development
Expected 5 year CAGR: ~12%
2
PV Finance largest and expected to
grow
► PV finance forms the largest segment of auto financing Industry at ~INR 761 Bn (~60% share).
► PV finance penetration set to grow again buoyed by underlying asset sales, new customer segments and entry of new players in the market.
Expected 5 year CAGR: ~17%
3
PV finance market is evolving
► Entry of fleet operators has created a new customer segment; rural market continues to grow; financiers have to innovate faster to tackle competition
► Ubiquitous nature of internet usage has made customers more knowledgeable, demanding of hassle free service and bundled products and services
Ability to innovate has become critical
4
Used car financing is also growing
► The used car market is currently 1.2X of the new car market, with organised share of used car financing at 14% only
► The average age of used cars is 4 years and reducing product lifecycle will ensure further penetration
Expected CAGR 14%%
5
*Source: SIAM, RBI Data, EY Analysis
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Captives are emerging as a key driver of growth and innovation in the Industry
Auto financing market in India – Point of view
Emergence of captives
► Most foreign OEMs have set-up captive financing companies in India to improve finance penetration and encourage sales
► Captives are allowing OEMs to re-engage with customers post car sale ► Captives support dealers by offering suitable financial support and encourage
finance penetration through wholesale-retail linkages
~11-13% share of captives in auto finance market
6
Credit risk is being managed
well
► Increased coverage of target customer segments through credit bureaus ► Use of credit scoring models and appropriate pricing of risk by market leaders ► Multi-layer verification process by leveraging outsourced agencies ► Evolving digitally enabled collections techniques
NPAs of 0.5-0.6% in the industry
7
Profitability needs to be
watched closely
► Being a low margin product, ROAs on this business have typically not been high ► Funding cost is a key driver, multiple instruments are available today to drive
these down ► Yields are being managed through a balanced portfolio mix of high yield
segments, used car financing, and cross-selling
ROA 1.5-2.25% for market leaders
8
Commandments for success
► Move away from generic products to targeted customer propositions ► Be nimble, target the rapidly emerging customer segments ► Fulfil ownership and mobility needs through lending and leasing propositions ► Enhance brand value, reduce product lifecycle, and improve dealer profitability
and yields through used car financing ► Leverage asset tested customer base to grow beyond single product exposure ► Deploy advanced credit assessment measures to price the risk appropriately ► Limit credit losses through a robust collections framework ► Create best in class customer experience by enabling faster approvals ► Keep funding costs under control through appropriate mix and parental support ► Maintain ROA above 2% by deploying these principles
360 degree approach to business
9
*Source: SIAM, RBI Data, EY Analysis
Table of contents
1. The automotive environment
2. The auto finance market
3. 10 commandments
4. About EY
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Driven by stable economic growth, increase in consumption pattern and proportion of working age group..
Source: IMF
India’s GDP per capita expected to exceed US$2,000 by 2017
1430 1522 1496 1508
1627 1808
2103
2010 2011 2012 2013 2014F 2015F 2017E
Real–rich (INR360,000 and above)
Prospering (INR120,000 to INR240,000)
Upper–class (INR240,000 to INR360,000)
Emerging (INR30,000 to INR60,000)
Surviving (Below INR30,000)
Source: Kotak Institutional Equities Research
Evolving (INR60,000 to INR120,000)
Improving household consumption patterns over next10 years
48% 21%
5%
37%
50%
47% 29%
12% 22%
34%
45%
3% 6% 12% 20%
2011 2015 2020 2025
66.9 64.8
64.0 63.2
60.2 55.4
50.0 43.9
38.9 33.8
29.2 24.6
17.0 11.8
8.3
2.5 1.0
0.3 0.1 0.0
53.9 55.7
57.5 59.2
60.6 61.8 62.8 63.0
62.3 60.0
57.8 54.2
47.5 38.6
28.8 19.0 18.4
11.0 5.1
1.8 0.4 0.1
0-4
10…
20…
30…
40…
50…
60…
70…
80+
85…
95…
2050 2011
61.6 59.4 58.6 57.7
55.3 51.1
46.4 40.8
36.3 31.7
27.6 23.6
17.1 12.6
9.5 6.1
4.8 3.1
1.2 0.4 0.1 0.0
49.8 51.4
53.1 54.6
55.9 57.1
58.1 58.5 58.1
56.3 54.9
52.5 47.9
41.0 32.7
23.3 25.8
14.8 7.5
2.8 0.7 0.1 Female
(millions) Male
(millions)
Increase in working population age group
Source: United Nations, Department of Economic and Social Affairs, accessed 7 June 2013 Rise in middle class and working population to fuel the growth of auto finance Source: United Nations, Department of Economic and Social Affairs, accessed 7 June 2013
65% 68%
4% 10% 1% 2%
2010 2050
0-14 15-64 65-79 80+
Source: United Nations, Department of Economic and Social Affairs
India’s favorable demographics (age groups)
Auto financing market in India – Point of view
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...and emergence of new fast growing and high OEM focus segments such as mini, compact and UV..
Auto financing market in India – Point of view
Micro, 1% Mini, 20%
Compact, 41% Super Compact, 2%
Mid Size, 7%
Executive, 1%
Premium, 0.2% Luxury, 1%
UV, 21%
Vans, 6%
FY15: PV Industry segment mix
Micro, 1% Mini, 15%
Compact, 32%
Super Compact, 4% Mid Size, 9%
Executive, 1%
Premium, 0.2%
Luxury, 2%
UV, 29%
Vans, 8%
FY20E: PV Industry segment mix
Micro Mini Compact Super Compact Mid size Executive Premium Luxury UV Van
Price Range (INR) Below 250K 250 – 450K 450 – 800K 600 – 800K 750K –
1.2Mn 1.3 –
1.85Mn 1.85 – 3Mn Above 3Mn UV 1,2,3 -600K – 1.5Mn Up to 1Mn
Body Style Hatchback Hatchback Sedan/ Estate/ Hatch/ Notchback Sedan/Estate/Hatch/Notchback
Sedan/Estate/Notch
Utility (SUV/ MPV) Box
CAGR (FY16E-FY20E) 17% 6% 7% 29% 17% 17% 49% 13.5% 19% 17%
Level of competition
UV 1,2,4 – UV3
V1 V2
Top OEMs Tata Maruti, Hyundai, Chevrolet
Maruti, Hyundai, Tata
Toyota, Maruti, Mahindra
Honda, Maruti, Hyundai
Toyota, Hyundai, Fiat
Skoda, Toyota, Hyundai
Audi, Mercedes, BMW
Mahindra, Maruti, Ford. Hyundai, VW
Maruti, Tata, Mahindra
High Moderate Low Source: SIAM,, EY Analysis Segment mix is by number of units
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..the automotive sector in India is expected to rebound
Auto financing market in India – Point of view
2.6 2.7 2.5 2.6 2.9 3.2
3.6 4.1
4.6 2.3% -6.1% 3.9%
11.4% 11.8% 12.1% 12.5% 12.9%
FY12 Actual FY13 Actual FY14 Actual FY15 Actual FY16 FY17 FY18 FY19 FY20
Y-o
-Y G
row
th
Sale
s in
Mill
ion
Total PVs PV Y-o-Y Growth
► India is expected to witness high growth in PV over 2016-20 period as the economic environment improves amid a strong reform push by the new government
► 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 numerous new launches, country specific models, along with high technology adoption
PV market is expected to grow at a CAGR of ~12% over next 5 years
► India is expected to witness high growth (10.7%) in PV density over 2012-18 period as compared to 2.6% for the world and 4.0% and 4.4% in Brazil and Russia, respectively.
► India PV parc is expected to exceed that of Brazil by 2018, while mature markets like Western Europe and Japan are expected to witness stagnation in PV population.
Source/s: SIAM, LMC Automotive , BMI Automotive, EY analysis
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The Indian auto financing market has gone through several peaks and troughs over the last 17 years…
Auto financing market in India – Point of view
1998 ~2006 2007~2009 2010 ~ 2015
Business circumstance
► Strong auto sales growth (~20%) and liquidity in economy attracts banks
► Liquidity crunch, rising defaults force leading financiers to exit the market
► ~75 bps increase in auto loan interest rates dampens sales growth (~9%)
► Intense competition leads to reduced interest rates, product innovation
Financier needs
► Aggressive to capture auto financing market share
► Reluctance to lend to retail segment ► Focus on building strong OEM relationships
► Focus on increasing penetration and volumes
OEM needs ► No specific financing needs ► Seek to Increase focus on semi-
urban/rural areas ► Focus on relationship with financiers
► Consolidate/strengthen market position ► Improve dealer control and profitability
OEM
Fin
anci
ng s
trat
egie
s
Financier tie-ups All OEMs
All OEMs; some OEMs tie up with local market NBFCs to increase rural focus. (For
example, Maruti ties up with MMFSL) Maruti, Hyundai, Honda, GM, Fiat
White-label finance
Maruti tied up with Citicorp Financial to form Citicorp Maruti Finance Ltd. (CMFL) No white label financiers in market after CMFL experiment failed
Indian captives Mahindra & Mahindra and Tata Motors Mahindra & Mahindra and Tata Motors Mahindra & Mahindra and Tata Motors
Foreign captives
Limited presence; GMAC, Ford’s JV with Kotak Existing players exit; no new entrants VW (VW, Audi, Skoda, Porsche), BMW
Daimler, Toyota, Renault-Nissan, Ford
Source: EY analysis, market insights
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…and is poised for a breakout again, on the back of climbing PV sales
Auto financing market in India – Point of view
Source: SIAM, Mahindra Financial Services, EY Analysis, Insights gained from market discussions
The new PV finance is market is attractive for new entrants due to current substantial size, high finance penetration and strong underlying asset sales, which will continue to drive the market growth in the future
601 650 711 694 761 868 997 1,169 1,403 1,636
FY11E FY12E FY13E FY14E FY15E FY16P FY17P FY18P FY19P FY20P
CAGR: ~6% CAGR: ~17%
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%
…New PV finance disbursements have turned positive and will continue to grow
~77% ~75% Penetration
~75% ~70% LTV
Page 12 Auto financing market in India – Point of view
NBFCs and captives have emerged as the growth engines of the auto financing industry..
Out
stan
ding
veh
icle
fina
nce
book
(IN
R B
n) The top 3 private sector banks dominate the market due to
their wide customer base, competitive rates, customer service and cross-selling supported by aggressive marketing and wholesale financing tie-ups with dealers.
Pvt. Bank
Independent NBFCs have increased their market share by expanding to non-metro areas and catering to high risk customers to whom banks are hesitant to lend and flexible processes to accommodate a wide set of customer profiles
NBFCs
Captives such as have increased their share by largely catering to rural areas (Indian captives) or offering subvention linked innovative products (foreign captives). They are known for customized loan offerings and bundled products Captives
Source: Company annual reports, India Ratings and Research reports, EY analysis
The new PV financing is highly competitive in nature with private sector banks holding on to market share; NBFCs and captives have been able to garner market share by identifying niches in terms of under-catered regions or innovative products
Except for the largest PSU bank, most of the other banks have lost significant share due to rising NPAs and tight credit environment following the crisis. They compete predominantly using competitive pricing and low service costs.
PSU Bank
Changing competition landscape in new PV financeWhile multiple financiers exist in the market, top 10
players account for ~80% share of the new PV financing market
FY10E FY12E FY15E
NBFCs Captives
47-49% 44-46% 45-48%
35-37% 29-31% 22-24%
10-12% 14-16% 17-19%
11-13% 9-11% 4-6%
~700 ~1,000 ~1,700
Public Sector Banks Private Sector Banks
Page 13 Auto financing market in India – Point of view
..and have been particularly successful in “bank ignored” niche segments such as premium and low income…
► Private and PSU banks ► Low risk: low yield ► Dealer and direct channels
important
1 ► NBFCs and Indian captives ► High risk: high yield model ► DSA and dealer important
2
► Foreign captives ► High-end customer segment ► Dealer is most important
3
Ris
k
Yiel
d
Low Income High Income
Self employed: without income proof
SB
Self employed: with income proof
Salaried: private and government
S: Large South Indian NBFC M: Large rural/semi-urban NBFC C: Large diversified NBFC MM: Rural focused auto finance
TM: Large Indian captive V: European captive finance company D: Luxury car finance company B: Luxury car finance company
HB
IB
1
3
V D
B
Middle income
2
Segment Profile
C S
M
TM
M2 KP
Banks NBFCs Captives
SB: Large public sector bank IB&HB: Large private sector banks
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Key
stak
ehol
ders
Auto financing market in India – Point of view
The role of captives is set to evolve from enabling OEM’s sales growth to driving customer lifecycle engagement, dealer profitability, product innovation, and greater credit access to the customer.
Potential to offer differentiated finance
schemes with subventions to increase sales in urban areas
Potential to improve dealer relationship and control by
providing inventory and other fund requirement
Ability to bridge existing credit gaps and increase
sales
Offer product, customer segment and geography –
specific schemes
Improved profitability due to incremental sales and
increased in-house finance penetration
Ability to develop a customer database, use analytics and
leverage for re-sell and cross sell
Ability to independently conduct creative marketing
campaigns
Potential to enhance residual/resale value and increase used car sales
Potential to improve after sales revenue by offering
bundled products
Potential to improve customer relationship by
offering “one stop solution” through bundled products
Opportunity to improve customer loyalty
Pre-sales Sale Post-sale Re-purchase
Improved Group Profitability
Car lifecycle
Goal Incremental sales
Brand enhancement
Objective of Captive
OEM
Dealer Profitability and Control
Customer Engagement
Dependency on existing financing
channels
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Foreign OEMs with captive financing set ups
Auto financing market in India – Point of view
...hence, most foreign OEMs have adopted the captive route to improve finance penetration
Hig
h M
ediu
m
Fina
ncin
g pr
oduc
t di
ffer
enti
atio
n
50% 100% Finance penetration
6%
9% Indian OEM
2
Low
Japanese OEM
3%
American OEM
45% Indian OEM
16%
Korean OEM
1.8%
American OEM
3
7%
Size of bubble represents market share (FY’15) Source: Company annual reports, India Ratings and Research reports, EY analysis
OEM categorization
1
Indian OEMs with captive financing set ups 2
Financing through tie-ups: Banks and NBFCs 3
► Increased usage of differentiated products
► Enhanced dealer relationship management
► Reduced finance penetration due to focus on rural segments
► Offer a combination of standardized and customized products
► Standardized finance product offerings and cash discounts
► Very high penetration by market leader
5%
Japanese OEMs
1.7%
0.6%
0.3%
0.4%
European 0.4%
European OEMs
European 1.8%
1
1.8%
Indian OEM
Page 17 Auto financing market in India – Point of view
…and drive OEM sales through subvention schemes and differentiated products such as buyback guarantee, balloon
0.5% 0.1% 0.1% 0.5% 0.0%
1.0% 1.2% 0.5% 0.5%
1.5% 1.5%
3.0%
9.0% 10.0%
11.0%
0%
2%
4%
6%
8%
10%
12%
IndianOEM
AmericanOEM
KoreanOEM
JapaneseOEM
AmericanOEM
IndianOEM
IndianOEM
JapaneseOEM
EuropeanOEM
EuropeanOEM
JapaneseOEM
EuropeanOEM
EuropeanOEM
EuropeanOEM
EuropeanOEM
Auto sales and finance growth
Share of alternate products in total financing
Less than 1% usage of alternate products – combined share would
be less than ~5%
Alternate products have a high share in
overall financing
► Alternate products enhance overall customer value proposition ► A captive can attract premium customer segments by adding
differentiated products to their finance offering ► Data analytics can be deployed to understand customer-
buying behavior
Implications for Captives
► Alternate financing products such as leasing, step-up, step-down payments etc., are preferred by luxury segment customers
Observations
No Captive Indian Captive Foreign Captive
Source: insights from previous work done and inputs from market discussions, Numbers are approximations based on market discussions
Page 18 Auto financing market in India – Point of view
Dealer financing, besides addressing the financial needs of the dealer, leverages the wholesale-retail linkage to drive retail penetration..
Sustain business Working capital
Grow existing business Inventory funding
Expand (additional showrooms)
Term Loans
Retail sales with Wholesale-Retail Linkage
Inventory funding rate
Retail target achievement
Captive + OEM
Dealer
Retail rebate
Captive support Dealer requirement
3
Address all financial needs of dealers Flexible Inventory Funding Terms
Credit free periods
► Offer 30-day, credit-free period for inventory funding for select dealers
Relaxed payment scheme
► Flexibility and relaxed norms for re-payment such as staggered payments
► Relaxation of penal interest charges on a case-to-case basis
Support in difficult times
► Support the dealers in downturns to help develop a robust relationship
2 1
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Contact center connects with the customer
for collections.
Contact center notifies the customer on payment due/
updates address and contact details
Cross-sell re-finance/top-up/ to select customers
Auto financing market in India – Point of view
Captives have also been successful in improving customer engagement across the financing touch points along the auto lifecycle
Customer fills application forms
and submits all documents
Customer enquiry
Marketing finance
schemes Loan disbursement Application Collections and
recovery
Finance schemes to influence re-
purchase Cross-sell/upsell
Support re- purchase with buy-back and
used car financing
Auto-purchase cycle
Sale - Auto purchase Replacement Post sale - Service and maintenance Pre-sale - Enquiry
Auto-finance cycle
Servicing
Touch points
Lean period after expiry of free warranty
Additional touch points generated due to Captive financing
Dealer notifies the customer about
loan disbursement
Page 21 Auto financing market in India – Point of view
1. Move away from generic products to targetted “Customer value propositions”
Compact
Mid and Compact,
SUV
Premium,
SUV
Car segments Key customer segments A captive’s value proposition
First time buyers
Fleet Taxi segment (Drivers)
Rural segment
• Flexible and affordable finance schemes • Subventions and High LTV schemes
• Re-payment flexibility • High LTVs and longer tenure schemes backed by
risk-based pricing
• Subventions and products such as bundling and EMI structuring
• Ease of loan documentation
• High LTVs and longer tenure schemes backed by risk-based pricing
• Schemes designed according to income pattern
Mass urban
• Subvention and bundled products; buy back guarantee
• Ease and reduced TAT of loan documentation High income group
1
2
3
4
5
Page 22 Auto financing market in India – Point of view
2. Be nimble, target the rapidly emerging customer segments
Customer segments Segment characteristics Captive’s segment strategy Captive value proposition
Fleet/taxi
Low/middle income; difficult to get bank credit
Providing affordable finance
Re-payment flexibility and bundled maintenance contracts
Fleet Taxi segment (Drivers)
Avg. share of PV sales
is ~10%
► Low/middle income, prefer low immediate cash outflow
► Usually do not qualify for loans from private banks
► Target customers for local NBFCs with high interest rates
► Focus on providing affordable finance
► Tie ups with big fleet/ taxi players, for background checks and risk mitigation
► High LTVs and longer tenure schemes with risk-based pricing
► Schemes designed according to income pattern, such as daily repayment mechanism
► Bundled discount on extended warranty and annual maintenance
Rural
Low irregular/seasonal income; difficult to get bank credit
Making finance available
High LTVs and long tenure credit schemes with high interest rates
Rural segment
Avg. share of PV sales is ~20%
► Low income ► Irregular/seasonal income ► Limited reach of banks/usually
do not qualify for loans from private banks
► Target customers for NBFCs with high interest rates
► Focus on availability of finance
► High risk: high reward model ► Schemes designed according to the
income pattern for rural customers, with flexibilities on re-payment
Page 23 Auto financing market in India – Point of view
3. Fulfil ownership and mobility needs through lending and leasing propositions
1,374 761 21
PV Market PV Loan PV Lease
Car leasing market in India has a limited share of the market (FY15)
Car Sales
PV loan disbursements
Incremental PV leasing
(INR Bn)
# Units 2.6 million ~1.9 million ~21,000
Avg. Ticket Size ~INR 530,000 ~INR 380,000 ~INR 1,000,000
10-15% ~18% ~12% Projected growth (till FY20)
Growing passenger vehicle market with widening product portfolio, increasing sales of luxury cars and geographic
penetration
Increased disposable income and aspirations leading to
increased vehicle replacement trends
Increasingly corporates are looking for better expense
management; impending arrival of GST regulations
Increasing leasing product offering by existing leasing
companies. Furthermore new trends such as entry of OLA cabs into leasing business to
grow radio taxi business
2
► Indian car leasing market in India has a limited presence, largely dominated by India subsidiaries of global leasing companies.
► Leasing is prevalent in car price segments of more than INR 500,000 in Compact, Mid-size and Luxury
► While the total cars under leasing are at ~70K, the current leasing penetration of corporate sales is ~10% as compared to ~60% in European markets indicating the potential for future market growth
► Captives are looking at leasing proposition to drive sales of higher brand vehicles
► Large Indian OEMs are promoting leasing through internal divisions
Source: SIAM, EY analysis
1
3
4 Key
driv
ers
for
auto
leas
ing
in In
dia
Page 24 Auto financing market in India – Point of view
4. Enhance brand value, reduce product lifecycle, and improve dealer profitability and yields through used car financing
Buy-back schemes will enhance and safeguard residual value of the cars
1
Buy-back schemes/used car financing will allow a ready supply of good quality/certified cars for resale
2
Leverage reduced product life cycle of three years and up-sell next segment car to existing customer
3
Offer buy-back guarantee before the end of the product life cycle to
achieve higher residual value
No of Years 0 1 2 3 4
New Car sales
New Car Used Car Used car sale
OEM Captive
Buy back guarantee
1 2a
2b
Used car exchange program/ buy-back schemes Upsell the next product with attractive finance schemes
Repurchase cycle reducing to three years
Customer information database Leverage the customer database to upsell the next product
2-4 years ~40% of the used car
buyers are below 30
years of age
~40% of Customers change
the cars within 4 – 6 years, followed by
~30% which do in 2-4 years
Captive’s used car proposition
Used car Financing
Page 25 Auto financing market in India – Point of view
5. Leverage asset tested customer base to grow beyond single product exposure
Yield/risk
Strategic segments
Volume segments
Captives can improve yields by offering product variants such as used car, high tenor, high LTV, balloon etc products. Once stable, they can even leverage asset tested customer base to offer semi-unsecured and unsecured products based upon repayment track, at higher yields.
Phased approach of retail products
New vanilla car financing/ subventions
Car Leasing
Extended top-up/ refinance
Bundled products
Exchange/ buyback
Bullet/ balloon/ step up
High Tenor High LTV
Flexible EMI/ step up
Used car financing
Setup phase
Expansion phase
Breakout phase
Page 26
6. Deploy advanced credit assessment measures to price the risk appropriately
Scoring decision Process decision Typical profile Weight
Score Band 1 Fast track approval
► 10%–20%* customers ► Premium profile customers
can jump the queue and provided fast track approvals
15%–25%
Score Band 2 Standard approval
► 40%–50%* customers ► Regular approval process
(2-24 hours)
35%–45%
Score Band 3 Referral approval ► 20%–25%* customers ► Detailed subjective credit
underwriting
15%–20%
Score Band 4 Rejected ► 15%–20%* cases ► Rejected upfront to improve
process efficiency
5%–19%
Maximum financing amount
Maximum LTV
Maximum tenor
Risk-based pricing
Underwriting decision
Some large Indian captive finance companies have deployed a risk based pricing models, which provide interest rate and LTV based on customer risk profile and asset quality of the geographic location of the customer
Leading practices
Auto financing market in India – Point of view
Profile related
Credit track record
Income related
Micro-market based
Scoring parameters Scoring decision Process decision Typical profile Weight
Score Band 1 Fast track approval
► 10%–20%* customers► Premium profile customers
can jump the queue and provided fast trackapprovals
15%–25222225222222222222 %%%%%%%%%%%%%%%%%%%
Score Band 2 Standaaardrrrrrrrrrrrr apppppppprpprprprprprprprprprprprprprprprprrp ovovovovovovovovovovovvovovovaaalalalaaaaaaaalaalalalaaa
► 40%–5050505050505050505055505050505050505050%*%*%*%*%*%*%%%%%%*%%%%%%%%% cccusussusususuususussussusssuustoooooooooooooooomemmemememememememememememememmmeeersrrsrsrsrsrsrsrsrsrrrssrssssrs►►►►►►►►►►►►►►►►►►►►►►►►► ReReReReReReRReReReReeeeReReReReRReR gulaaaaaaaaaaaaaaaaarrrrrrrrrrrrrrrrrr apapappapappapapapapapapapapapaapapapprprprprprprpppprprprprprpprprpp ovovovovovovovovovovvvvovvvvvo alalalalalallalalalalalaaaaa prorororororororoooroooroororror cess
(2(2(2(2(2(2(22(2(2(2(2(2(2(22(2(2(2(2(2-24 hhhhhhhhours)
35%–45%
ScScScScScScScScSccScScScScSSScScScororrrrorrororrrorrorororeeeeeeeeeeeeeeeeeee BaBaBaBaBaBaBaBaBaBaBaBaBaBaBaBaBaaandndndndndndndnddndndndndndndnnnd 33333333333333333333 Reffffffffeffffffff rral approval► 20%–25%* customers► Detailed subjective credit
underwriting
15%–20%
Score Band 4 Rejected► 15%–20%* cases► Rejected upfront to improve
process efficiency
5%–19%
Maximumfinanananananananannaanananaaann ncing amount
Maximum LTV
Maximum tenor
Risk-based pricing
Underwriting decision
e related
it track cord
e related
-market ased
oringmeters
Page 27 Auto financing market in India – Point of view
7. Limit credit losses through a robust collections framework
Objective Prevent delinquencies Collect better to minimize flow Recover as much as possible
Ownership In-house + Outsourced In-house + Outsourced Largely outsourced
Collaboration Sales involvement for non-starter, early defaulters Legal involvement Extensive use of legal
Activity Tele-calling and SMS/IVR reminders Field collections Restructuring Repossessions and recovery
Analytics Decision trees Collections score-cards Repossession agencies
IT tools • Centralized Collections IT system to track bucket wise case movement • Exhaustive MIS (Bucket/Asset/Collector wise flow and normalization performance) and Analytics • Hand-held devices for field collectors with receipt generation capability
Leading practices
A rural finance company requires Sales Executive to handle early bucket collections to encourage right sourcing and manage customer relationships
Leading private sector banks monitor pre-NPA accounts stringently and use legal effectively
NBFCs dealing in cash collections utilize mobile apps for tracking of collections force; online sale of repossessed vehicles for faster disposal
Current Due Bucket 1 (DPD 0-30)
Bucket 2 (DPD 31-60)
Bucket 4 (DPD 91-
120)
Bucket 5 onwards (DPD 120+)
Early buckets Mid buckets Hard buckets
Bucket 3 (DPD 61-90)
Page 28
Bank-led
Auto financing market in India – Point of view
8. Create a best in class customer acquisition experience by enabling faster approvals
1.1 Customer is informed about auto finance product by
the DSE*
3.2 Basic eligibility criteria verified (e.g.
income, CIBIL, de-dupe, ITR checks) and sample RCU
Application Underwriting
Awareness /knowledge
Loan sanction (Hard approval)
Loan processing (Soft approval)
Documentation Disbursement Select and apply
Customer receives targeted marketing offers for auto loan
products
Customer visits the financier’s branch/
website/ mobile banking to obtain
information
Customer compares financier products
through TPT websites such as
bankbazaar, cartrade etc.
2.1 Customer provides basic
information for pre-qualification
2.2 DSE suggests financing product/
provider as per customer profile
Customer receives pre-approved loan offer basis existing
relationship with financier
3.1 Hygiene checks performed at Bank
processing unit
3.3 Soft approval communicated to
the dealer/ customer
2.3 Customer provides initial
documentation to the DSE
2.4 FE* logins the customer application and uploads scanned
copy
3.4 Customer decides to proceed or refer alternative financiers for better
offer
4.2 Credit assessment conducted as per
internal scoring models
4.1 Field Investigation and Telephone
Verification triggered as applicable
4.3 Deviations checked and approvals taken as
per authority matrix
4.4 Approval communicated to customer/ dealer
Customer tracks application status
through Net-banking/ Phone-banking
Disbursement
5.2 Customer drops off documents at the dealership/ branch
5.1 List of pre-disbursement
documents shared with customer
5.3 FE visits customer to collect the documents from
customer’s residence/office
5.4 Physical file transfer from dealership to
financier office
Verification of original documents
1 2 3 4 5 6
Dealer submits down payment receipt
Execution of loan agreement at
customer office/ residence or bank
branch
Loan disbursed to dealer
Dealer given a portal access integrated
with the financier’s systems
24-72 hours 48-72 hours
Pain points
Standard Practice
Leading Practice
Dealer Sales Executive
Call center executive
Digital Finance executive
Financier systems Dealer-led Third party-led
Field agents
Page 29 Auto financing market in India – Point of view
9. Keep funding costs under control through appropriate mix and parental support
Asset Liability Management
Cost of funds
Rating and security
FPI route
Parent support
Sources of funds
Liquidity risk is not a major concern for NBFCs in India. Multiple liquid debt instruments such as bank borrowing, CPs, NCDs and ICLs are available from the Indian market. Recently, a new instrument of rupee-denominated bonds that can be issued in the international markets has been permitted
Letter of comfort, corporate guarantee from global parent can improve credit rating and has a positive impact on borrowing costs to the extent of 1%–2%
Issuing NCDs requires a minimum credit rating of “A2” and issuing CPs requires a credit rating of “A3”; furthermore, all NCDs, including short-term NCDs should be fully secured thus rating and security are key considerations for a NBFC
Global parent can invest in the debt borrowings (CPs and NCDs) issued by the Indian finance entity, through the FPI route
While the equity component varies, the cost of funds ranges between 8.5%–11% for majority of finance companies
~20%–50% of outstanding book is typically short term in nature; Most entities have an ALM mismatch in the initial years, diverse funding sources available in the later years reduce the ALM mismatch
1
2
3
4
5
6
Page 30 Auto financing market in India – Point of view
10. Maintain ROA above 2% by deploying these principles
NBFC Bank
NBFCs have higher lending rates on account of higher cost of funds than banks, which rely primarily on low-cost deposits for funding NBFCs rely on expensive market instruments such as bank loans, NCDs and CPs driving up cost of funds
Fee income primarily includes processing fee on loans
Banks have a higher allocated opex, which consists of employee expenses, branch expenses, technology and also increased compliance costs
Credit losses in the industry are stable at 0.4-0.8%
Overall NBFCs make a higher RoA than banks over the long term on account of higher yields and portfolio mix
Interest income
Fee income
Opex
Credit losses
RoA
13%
4.5%
2.5%
0.5%
2.0%
8.5% Cost of funds
Margin
0.5%
Total income 5%
Interest income
Fee income
Opex
Credit losses
RoA
10.5%
4.5%
3.0%
0.5%
1.5%
6.0% Cost of funds
Margin
0.5%
Total income 5.0%
Page 32 NBL assistance
FINANCE
STRATEGY AND PLANNING
Balance Sheet Management and ALM Transfer Pricing Capital Structure Investment and Break
even
Operating model Brand strategy Corporate communication
Vision and Mission
Market assessment
Partnerships and alliances
Strategy and Business model
CHANNEL MANAGEMENT
Dealer Operations
Call center/IVR (outbound, inbound)
External vendor management
Branch Network
Digital capabilities
SALES AND MARKETING
Product Development and
Management
Campaign Development and
Management
3rd Party Products distribution
Advertising and Campaigning
Sales force Effectiveness
Branding and Marketing
OPERATIONS AND PROCESSES End to end Workflow
Retail back Office Operations
Centralized processes
Integration with dealers / vendors
Process Documentation
Process Automation
RISK MANAGEMENT ANDTREASURY
Operational Risk
Internal control & Fraud Management
Legal, Compliance and RBI reporting
Credit Risk
Treasury Operations
Governance
Market Risk
CUSTOMER MANAGEMENT
Customer Life Cycle Management
Segmentation and Profiling
Rewards and Loyalty
Customer Grievance redressal
Products selection
Customer Service
Customer profitability
DEALER FINANCING
Inventory funding
Subvention
Loss sharing
Limit management
WC funding
Inventory monitoring
TECHNOLOGY Business and IT
alignment Technology Architecture
IT Sourcing and vendor mgmt Service Levels Helpdesk and
Support Enterprise
Control Loan Origination
Solution
HUMAN CAPITAL MANAGEMENT Organization
Structure and Roles Manpower Planning Talent Management and Skill Upgradation
HR Systems and Processes
Leadership Development and Succession Planning
Employee Cost Optimization
Performance Management and Incentivization
Talent Attraction and Retention Change Management
1
2
4
6
5
5
3
ROE / ROA
EY has significant capabilities across the auto financing value chain
Page 33
EY Global Automotive Practitioner Network
U.S. 1556
Mexico 333
Brazil 290
UK 180
Germany 827
France 178
Italy 161
India 648
China 873 Korea
117
Indonesia 91
Philippines 76
Thailand 159
Japan 444
EY’s Automotive team comprises of ~7300 practitioners across the world
EMEIA 2840
AsiaPac 1550
Japan 444
Americas 2497
Auto financing market in India – Point of view
Page 34 Auto financing market in India – Point of view
..and a ‘industry’ experienced local auto finance execution team
India Financial Services Advisory leader
Rohan Sachdev Partner ► Leader, Financial Services – Performance
Improvement practice in India ► 15 years of experience in assisting large
international and domestic BFSI entities in strategic and operational transformation
Global Automotive Finance Leader
Jens Diehlmann Partner ► 18 years of automotive finance experience ► Co-author of the Book “Automotive
Management” which comprises the full automotive value-chain under the focus of financial aspects
Partner – financial services and auto finance expert
Fali Hodiwalla Partner ► 15 years of experience with advising
banking and financial services clients ► Extensive leadership experience in defining
entry strategy and setting up captive auto finance entities in India
India Leader – Automotive Sector
Rakesh Batra Partner ► Account partner for large auto OEMs
globally and in India ► Leadership experience in assisting large
automotive and eco-system players in strategic and operational improvement
NBFC leader and auto finance expert
Himanshu Bansal Director ► Over 14 years of Banking & Consulting
experience in Strategy, customer solutions and retail lending
► Extensive leadership experience consulting auto finance companies and captives in market entry
Auto Finance Team
Bhavin Sejpal Manager ► BFSI experience of over 5 years with focus
on retail and wholesale finance segment ► Recently assisted a large OEM in feasibility
study for a captive finance company set-up
Auto Finance Team
Trupti Bagwe Manager ► BFSI experience of over 5 years with focus
on non-banking finance space ► Extensive experience in auto finance
market entry, strategy and operational improvements
Auto Finance Team
Vivek Sapre Manager ► BFSI experience of over 5 years with
industry experience in auto finance ► Assisted large vehicle finance companies in
operational transformation and new company set-up
Page 35 Auto financing market in India – Point of view
EY Offices
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For further insights, please contact: Fali Hodiwalla Partner Performance Improvement - Financial Services Email: [email protected] Phone: +91 98201 39302 Himanshu Bansal Director Financial Services – NBFC sector Email: [email protected] Phone: +91 97698 43789
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