Mumbai: Non-banking financial companies (NBFCs) are stepping up the funding of used cars, seeing it as a growth driver over the next two-three years, especially with electric vehicles (EVs) gaining traction in the Indian market.
Mahindra Finance, Shriram Finance, Poonawalla Fincorp, Cholamandalam Finance and others expect wider acceptance in the metros for used EVs. Finance penetration in this market has grown from 20% a year back to about 35% currently, according to executives.
The other key driver behind the sustained growth momentum is the enhanced transparency of a sector that’s becoming more organised.
The overall used car market grew 7% in FY23 to 4.5 million units; it’s pegged at 7 million vehicles by FY26.
“The used car business is far more organised and the vehicles are quality, price and warranty certified. This makes it easier qualitatively at lower risk for NBFCs to finance such vehicles,” said Ramesh Iyer, vice chairman and managing director, Mahindra Finance. It finances 15,000 units a month on average. It exceeded 20,000 vehicles in March.
A noteworthy trend is the increase in the share of EVs in used car market.
High Prices, Waiting Periods for New Cars Boost Used Car Market
This is despite the fact that EVs appear to lose value less rapidly than similar internal combustion engine (ICE) vehicles. A two-year-old EV sells at 70-75% of a new car’s price, while an ICE model of comparable age sees a reduction of at least 50-60%. On the other hand, the higher prices of new EVs are persuading customers who want to go green to opt for used ones, said an executive at an EV maker.
Used car platforms such as Spinny and others are making the market more organised, meaning there’s less opaqueness over quality and price assessment. Spinny is also seeing an increase in the used EV portfolio.
“The overall (used car) category is growing very fast, with return on capital higher in the used car market for financiers as against new cars,” said Spinny CEO Niraj Singh. “The increasing financing options, and lower interest rates are driving used car growth.”
Used car company Mahindra First Choice Wheels agreed that there is increasing acceptance of used cars as the market gets more organised.
“Our used car sales continue to be strong, with a volume growth of 22% during FY23. This reflects the increasing acceptance of used cars by consumers, greater formalisation of the sector and the quality of cars sold by our dealer partners,” said Ashutosh Pandey, MD & CEO, Mahindra First Choice Wheels. “March, with a better demand supply position for pre-owned cars, was our highest month for used car financing. Besides, in the new car business the volume growth is not substantially increasing.”
Moreover, new car prices are on the rise and there is a waiting period for popular models. And with more people returning to offices, demand is strong. Since the pandemic, there has been a clear psychological shift in favour of car ownership, especially used vehicles, executives said.
Also, NBFCs are less risk-averse, unlike banks, which are hesitant to finance used cars, said an NBFC executive. Not only are NBFCs offering competitive rates, but they are also integrated digitally, making the financing of used car loans much quicker, he added.
