Vehicle Loan AUM To Vroom Past Rs 8 Lakh Crore Next Fiscal: Crisil Ratings

The vehicle financing assets under management (AUM) for non-banking financial companies (NBFCs) are poised to surge to Rs 8.1 lakh crore by March 31, 2025, from Rs 5.9 lakh crore as of 31 March 2023, marking a compound annual growth rate (CAGR) of 17 per cent, ratings agency Crisil has said.

Asset quality will continue to improve, too, amidst sustained macroeconomic activity. Consequently, profitability will remain stable, buoyed by declining credit costs, even as higher borrowing costs over the past few quarters could compress net interest margin (NIM).

Growth will be driven by rising demand for commercial vehicles (CVs), cars, utility vehicles (UVs), and two-/three-wheelers, accompanied by bigger ticket financing and the government’s focus on infra spending.

CVs hold the lion’s share in vehicle financing AUM, constituting around 50 per cent as of 31 March 2023, followed by cars/UVs at 29 per cent, two-/three-wheelers at 11 per cent and tractors at 10 per cent.

Says Ajit Velonie, Senior Director, Crisil Ratings, “CV finance is seen growing 12-14 per cent per annum over fiscals 2023-25, propelled by growth in end-user industries such as cement, steel and consumer durables. Financing of cars/UVs and two-/three-wheelers will also see robust growth of 23-25 per cent per annum because of rising sales of premium models and the large-scale replacement volume expected for two-wheelers. Financing of tractors, however, will grow at a relatively moderate pace of 8-10 per cent per annum following an uneven monsoon.”

The AUM growth has also been fuelled by used vehicle financing as increasing prices of new vehicles spur demand for used ones. Consequently, the share of used-vehicle financing rose to ~40 per cent from ~33 per cent in the past four years, clocking a CAGR of ~13 per cent vis-à-vis ~4 per cent for new-vehicle financing during the period.

Besides AUM growth, credit profiles of vehicle financiers have also been supported by steady improvement in asset quality since the last fiscal. An analysis of vehicle financiers rated by CRISIL Ratings, accounting for over 90 per cent of the sector’s AUM, indicated that overall 90+ days past due (dpd) improved by ~120 basis points (bps) to 4.7 per cent last fiscal.

Malvika Bhotika, Director, Crisil Ratings said, “Given the strong correlation of asset quality with overall economic activity, the overall 90+ dpd should improve by ~50 bps to 4.2 per cent this fiscal and sustain at a similar level next fiscal. The improvement in early bucket delinquencies over the past two fiscals, as reflected in the ~720 bps decline in the 30+ dpd, indicates the same. While improvement is expected across segments, the tractor segment’s asset quality will need to be watched closely, as it is contingent on monsoon patterns, agricultural yields, and rural activity.”