How Auto Finance Business is Always Considered as Profitable: Know More about RBI Compliance & Business Perspective in India?

Narendra Kumar

04 Jun, 2019

The whole auto finance industry is on the edge of being reformed adoption of technologies & business models led by new trend and design.

How is Automobile finance business shaping Indian Lending space?

Auto Financing is a commonly termed how one pays for the vehicle. In many of the cases, cars are financed by taking out an auto loan to buy or lease the car which involves receiving a credit check. Auto financing, also termed as car finance, car financing or auto finance, mentions to the assortment of financial products available that allow persons to obtain a car with any arrangement other than a full-cash single lump payment (outright payment). The provision of car finance, usually by a bank or some kind of financial institution, allows consumers to pay the dealer or manufacturer, even though they do not have the money, i.e. car finance allows the consumer to buy a car by borrowing the money so that the vendor can be paid.

The whole auto industry is on the edge of being reformed by new technologies & business models led by ridesharing, connected cars & eventually autonomous vehicles. These changes will have major impacts on auto finance, from changing vehicle ownership & usage models to new data sources to different types of customer interactions. When fixed with varying customer prospects & increasingly digital lending processes, tomorrow’s auto lender will look much dissimilar than what one is used to & require a different operating model.

Thus the auto lenders register the new course risk & compliance leaders require to be proactive in understanding & responding to change, whether that comes in the form of business model transformation, emerging technologies, or increasing volatility in the credit environment & vehicle valuations.

Auto Finance Compliance requirement in India?

In the world of auto finance compliance, fast funding is vital. Until the dealership obtains payments for the vehicles one sell, that money is just stuck in purgatory & isn’t helping the business in any way, shape or form. There’s a big difference between saying your friend owes you INR 25,000 & having INR 25,000 in your bank account, right? It’s simple to blame the finance company when funding gets delayed, but frequently, these hold-ups can be shortened or entirely avoided with more attention to auto finance compliance & proper processes within one’s dealership.

Hence, it’s time to do an informal auto finance compliance audit to figure out what your dealership is doing well, & what it could be doing better to ensure prompt funding.

In your dealership, who’s in charge of packaging up financial paperwork & contracts? Do you only have one person on staff responsible? Does anyone & everyone send out this type of information? In general, what works best for most dealerships (depending on size) is somewhere in the middle of those two scenarios. Train more than one person on the completion & sending of financial paperwork for funding – you never know when an employee will be out sick or on vacation. However, it’s helpful to allocate exact persons to own this task within one’s dealership. Accuracy is paramount, & you’re not likely to achieve it if you let everyone in the building touch financial paperwork.

Do you use the checklists the banks provide? You know those handy compliance checklists your lenders give you? Do you use them? Or do you use them to support your new origami hobby? The lenders you work with aren’t all the same – each one may like things done a little differently than the other. Stop thinking, I’ve done these a hundred times, I know how to submit a package, & shift your mindset so I’m only human & can make mistakes. If I always consult the checklist before sending, I will probably get money faster.

The packages which are not completed are one of the top reason why funding gets delayed, so swallow one’s pride & always use the lender checklists. Even better, use the checklist, & then have another trained employee double check your work against the checklist. Quality control only takes a few extra minutes, can save you countless dollars, & helps you maintain good relationships with your lenders.

Does your dealership office communicate well with your Finance and Insurance office? Dealership offices frequently handle the agreements, but what happens when there are problems with funding & auto finance compliance in one’s dealership? There needs to be an open line of communication between these two offices so that in the event funding gets held up, you can contact the F&I office immediately & resolve the problems quickly.

Time truly is money, thus if the quick funding has become an issue for one’s dealership, do not shy away from analyzing & improving your auto finance compliance processes. Communicate any changes with your staff & ensure they are all aware of any rules or regulations. The quicker one’s deals are funded, the faster one can pay off one’s floor plan & ensure one’s dealership is always stocked with the latest in-demand inventory.

Auto Finance – Business Perspective

The auto industry (passenger cars & multi-utility vehicles) has been a leading indicator of the growth of Indian economy. It has been growing at a rate of 16% for the past five years, roughly twice the rate of our GDP (gross domestic product) growth & it is expected that the industry to double in five years on the back of growing aspirations of the current set of manufacturers as well as the continued inflow of global players.

Auto finance drivers

• Buoyant economy leading to higher disposable income.
• New models & launches in untapped segments. Reduced ownership period to 36-40 months.
• Extended product life cycles & competition amongst manufacturers have kept a check on car prices. In some instances, prices are unchanged from a decade ago.
• Geographical expansion & better distribution by both manufacturers & financiers has opened up new markets.
• Credit bureaus have been of tremendous help in making informed credit decisions & lowering credit losses. For a thin margin business like auto finance, this has been a great help.
• With the better availability of credit data, financiers have been offering higher-loan-to-value, & balloon installment schemes enable customers to keep monthly EMIs at affordable levels.
• The changing customer mindset towards leveraging has meant that more customers are willing to take loans early in their working lives. This segment typically looks at their cash flows & the EMIs while deciding what car to buy.
• Post the financial crisis of 2008, lenders with large unsecured lending books suffered large losses. Car lending, being secured, saw relatively lesser losses, thus lenders this time around are focusing on funding such assets.

The Indian auto & auto finance industry is steadily moving toward recovery –

• Improving socioeconomic environment
• The turnaround in the auto industry – The Indian automotive industry is moving on its path of recovery, & is expected to gain further impetus in the medium term, mainly driven by Economic growth, reduced fuel prices, Government’s focus on road development.
• Present Value (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 & bundled products & services.
• Used car financing is also growing – The used car market is currently 1.2X of the new car market, with an organized share of used car financing at 14% only. The average age of used cars is 4 years & reducing product lifecycle will ensure further penetration.
• Credit risk is being managed well – Increased coverage of target customer segments through credit bureaus, Use of credit scoring models & appropriate pricing of risk by market leaders, Multi-layer verification process by leveraging outsourced agencies, Evolving digitally enabled collections techniques.
• Profitability needs to be watched closely – 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, & cross-selling.

Directives for success

• Move away from generic products to targeted customer propositions
• Be nimble, target the rapidly emerging customer segments
• Fulfil ownership & mobility needs through lending & leasing propositions
• Enhance br & value, reduce product lifecycle, & improve dealer profitability & 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 & parental support.