Banks Rev Up Used Commercial Vehicles' Business As Margin Shrinks
In addition to eyeing higher profitability, banks hope that their resources and branding would put them in an advantageous position over NBFCs.
India's banks are increasingly muscling into the used commercial vehicle segment, which has been the domain of non-banks, according to four bankers and three analysts, who spoke to NDTV Profit.
In addition to eyeing higher profitability from the used CV space, banks hope that their resources and branding would put them in an advantageous position over NBFCs by tapping more customers.
According to CareEdge Ratings’ note dated Feb. 7, the CV finance industry in India has assets under management amounting to approximately Rs 3.6 lakh crore, as of March 31, 2022. Here, NBFCs rule the show with 42.3% market share, followed by banks at 38.5% and anchor financers at 19.2%.
The note added that the used CV segment is largely dominated by NBFCs, and was able to clock a stable growth rate. As of March 2022, the AUM of the used commercial vehicle segment increased to 51.3%, from 48.8% in March 2021 and 45.9% in March 2020.
For the longest time, the demand for used CVs was concentrated among customers with not the best credit history or financial records, according to a private banker, who spoke on the condition of anonymity.
But with new trucks getting expensive, technology improving and companies like Tata OK and Ashok Leyland’s Re-AL entering, the advantages of the used vehicles are increasing, according to Tabish Jan, senior analyst at S&P Global Mobility.
“…margins and technological advancements are among the top reasons as to why banks are seeing this as an opportune time to get into this (used CV) segment,” explained Amit Mohan, president and head of logistics, infra, commercial vehicles and construction equipment retail loans at Kotak Mahindra Bank Ltd.
And this trend has largely been seen over the last one year as banks have realised that it is a scalable and viable business, he said.
The repricing of banks' deposits in tandem with the Reserve Bank of India's cumulative rate hikes of 250 basis points since May 2022, has resulted in compression in net interest margin.
Specific bank data about used commercial vehicle lending is not readily available.
Banks Shift Gears
Of the entire CV segment of Federal Bank Ltd., only 4% is used CV, a person familiar with the development told NDTV Profit, on the condition of anonymity.
But the lender plans to increase this share close to 10% in the next one year and about 15% to 20% going forward, this person said.
For AU Small Finance Bank Ltd., in FY24, approximately 45% of disbursements in vehicle financing business went toward the CV segment, said Bhaskar Karkera, head of retail assets at AU Small Finance Bank, in an emailed response to NDTV Profit’s queries. Of this, 45% was toward used vehicles.
“…we remain confident to boost our volumes for used commercial vehicles, in FY25 and FY26, in line with or better than the industry growth,” he said.
Yes Bank Ltd. also plans to increase its share in the used CV space, in-line with the overall retail assets growth strategy, said Lavesh K Sardana, country head of retail assets and debt management at Yes Bank, in an emailed response. It contributes on an average 25%-30% in overall CV disbursements.
“Our strategy in used CV revolves around increasing our distribution network and streamlining/rationalising our offerings; we have dedicated distribution in high potential markets to drive this product,” he said.
“The bank is keen to build this business and continue its focus on building distribution in FY25 and FY26 as well. We target to grow this business faster than the industry for the next couple of years,” Mohan of Kotak Mahindra Bank said.
Growth Drivers
Benefits in terms of cost, high yield and income generation potential continue to be the top reasons for hyped interest in this space, according to bankers and analysts.
In comparison to a new CV, in a re-financed CV, the severity of loss is lesser because the lender is funding the depreciated value, Mohan explained.
In addition, the loan-to-value of a used CV tends to be better as the first seller takes the depreciation hit and the next person who buys it, enters the market at a lower price point, a senior banker explained on the condition of anonymity.
Usually, in new CVs, banks tend to finance about 85%-90%, but in used CVs, they end up financing just about 70%, making it a lucrative space, this person said.
Compared to new CVs, yield on advances are 200-400 bps higher for used CVs, said Sardana of Yes Bank.
High Rewards Come With High Risks
While bankers and analysts continue to stay bullish on growth prospects in the used CV space, challenges remain.
“It is tough to say if banks can do risk mitigation properly because the customer profile of used commercial vehicles continues to be from the unorganised sector,” according to Sanjay Agarwal, senior director at CareEdge Ratings.
In this space, customers tend to pay with a lag of 15-30 days and banks may not be too happy with this; their collection efficiencies could get affected, he said.
Mitul Shah, executive director of equity research and automobile analyst at DAM Capital agrees. “The business is risky because the NPA probability is high, and cash flow may not be regular. Overall, the space is higher risk, higher returns.”
