When her office moved, Roma faced a daunting daily commute from her Vashi residence in Navi Mumbai to the Bandra Kurla complex in Mumbai. Not wanting to depend on unreliable autorickshaws in BKC, she decided to buy a car.
Given her immediate need, Roma opted for a second-hand vehicle and a few quick online searches led her to one of Mumbai’s many wholesale markets. Before Roma could put her negotiating skills to use, the dealership presented her with paperwork for a car sale, financing options for almost the full value of the vehicle, and third-party auto insurance to sign.
What surprised her was that a used car was sold for almost the price of a new car. After several more searches online and visits to several used car dealerships, she gave up and went back to the first dealership that had everything ready for her. That same evening, a deposit of ₹55,000 got her home in a three-year-old shiny blue Hyundai i20.
The next morning, Roma drove to the office and realized that many of her colleagues had recently upgraded to used cars, at prices very similar to Roma’s. It made him think of the time his sister bought a used car, about five years ago, a time when used cars weren’t as expensive and were largely the domain of non-banks while banks remained away from this segment.
Today, the fight for financing used cars – whether led by banks or not – is scandalous.
An exploding market
As Shruti Saboo, Director, India Ratings & Research, explains: “Demand for used cars has been steadily increasing due to consumers’ desire to improve their lifestyle, driven by the growth in middle class population and increasing disposable income. With the growing gap between supply and demand, prices of used vehicles have increased slightly. She adds that new car prices have increased post-Covid, and that this is one of the factors leading to the rise in used car prices, which are “expected to remain higher for the near future”.
Shortage of new vehicles, sustained demand driven by rising incomes, desire to move from two-wheelers to four-wheelers, customer awareness, digitalization and easier access to financing have contributed to opening up the market; prices in this segment have also increased in line with the approximately 20 percent increase in demand.
“Typically, the first holding period is around 3 to 5 years. At this time, during the Covid pandemic, new car sales have declined, meaning the availability of used vehicles coming to market is now lower and creating a gap between supply and demand,” says Aniket Dani, Research Director, CRISIL Market Intelligence & Analytics. . To top it all off, financiers’ eagerness to lend to retail consumers, particularly creditworthy borrowers, helped support demand, creating a vicious cycle of stretched valuations and higher loan amounts.
In short, with demand far outstripping supply, used cars have become a middleman market, and prices are also influenced by how middlemen price cars. Privately funded online sellers, such as Spinny, CarDekho, CarWale and Cars24, which dominate the market (accounting for 20 to 24 percent of sales in the used car market), appear to have added a layer of irrational exuberance, especially in matters of respect. prices, even if this is to the detriment of their own profitability.
Price is the key
Let’s return to the case of Roma. Assuming that the car would have cost ₹6.5 lakh three years ago, its depreciated value is expected to be around ₹4 lakh. Top it off with a dealer margin, the car should have cost him between ₹4.25 and ₹4.50 lakh at most, while the purchase price of Roma is ₹5.5 lakh. The current cost of the Hyundai i20 purchased by Roma is around 8.5 lakh. In 3 to 4 years, about 40 percent of the car’s value could be considered depreciation. Therefore, the price of the car would come to ₹5.1 lakh, which would clearly result in a pricing mismatch.
Old-timers in the used car finance industry say the increase in demand and the resulting need for financing has led to fewer on-site checks by financiers and a greater reliance on third-party appraisers , which in some cases leads to compromised underwriting. In cases where a higher loan-to-value ratio is not possible, ecosystem players have reported instances where lenders encouraged partnered third-party appraisers to increase the price of vehicles to allow for higher loan disbursement amounts. students.
A senior analyst at an automotive research firm agrees. “Unlike a few years ago, prices of used cars today are set based on the demand for similar variants in the new car segment. Some important considerations like car lifespan or miles driven are not adequately taken into account, and this is especially prevalent for cars above the entry-level hatchback segment. This poses a systemic risk, given the explosion in the used car sector,” he said.
Additionally, widespread price increases over the past 2-3 years and aggressive financing have led to increased demand for even older vehicles, including those closer to the 15-year limit for re-registration . This has also impacted the pricing of relatively new used vehicles, particularly 2020-2021 SUV models, which are now being sold for up to 80% of the value of a new car, according to multi-brand dealers.
Bubble in the making
Is a credit bubble brewing in this segment? According to a Crisil report, the share of used vehicle financing has increased from 33 per cent in the last four years to 40 per cent. The Financial Industry Development Council (FIDC) suggests that NBFC loans for used vehicles have increased by 154 percent in the last two years, while the loan price gap between vehicles of used and new vehicles decreased to 250 basis points against 400 basis points earlier.
The used car market is expected to reach $31.62 billion in 2024 and reach $63.87 billion by 2029. It is 1.3 times larger than the new car segment. Credit penetration in the used car segment has increased from single digits around five years ago to 15 percent. At a time when the RBI is warning lenders against accelerating consumer lending, it raises the question of whether the used vehicle ecosystem is a credit bubble in waiting.
This certainly appears to be the case, given that the current credit underwriting framework is very different from the past and lenders – particularly smaller banks and NBFCs – are riding the wave of demand. I hope the pedal is pressed to avoid an accident.
