Banks and captive financiers mostly dominate the New CV financing while NBFCs dominate the Used CV financing. The NBFC space includes major players like Cholamandalam Finance, Sundaram Finance, Shriram Transport Finance, Tata Motors Finance, etc.
It is to be noted that a large portion of used CV financing is still controlled by the unorganised sector (mainly moneylenders). Hence, the share of NBFC expects to increase with the formalization of the financing sector. Cholamandalam Finance is one of the leaders in Used LCV financing. Emerging players like SK Finance, Kogta Financial, and others expect to gain a significant share in the market with formalization of the sector.
Performance of CV-based ABS pools
As per a Dec 2021 study by ICRA, securitisation pools based on CV loans have depicted stable collection performance historically, including events like demonetisation and GST implementation in India. It is the segment that depicted faster resilience after a sporadic fall in collection efficiency due to nationwide lockdown in the first wave of COVID. Thanks to the steady performance of Light CVs due to a booming e-commerce sector and pick-up in demand for Medium & Heavy CVs due to the government’s focus on infra and real estate spending.
Over 2012-2021 (up to Sep), the cumulative collection efficiency of CV pools (except the ones that originated in 2020) remained above 90%. It has been noted that, historically, collections remained the weakest in the first quarter of every fiscal year and the strongest in the last quarter of every fiscal year. This happens due to urges of the CV financiers to boost collections at the end of the financial year to bring down the ratio of non-performing assets (NPA) and cut the provisioning requirement that hits their bottom line.
If we look at the issuers’ ratings across CV pools, the market is highly skewed towards AAA-rated issuers. In 2021-22, nearly 97% of issuances by volume in the sector were rated AAA(SO), indicating an asymmetry in the market with respect to the price discovery of securities at the lower end of the rating curve.
Factors affecting CV financing and pools
The growth in CV financing depends on sales numbers, penetration of the financial market, and a rise in average ticket size of loans. As evident in the below chart, sales volume has been recovering post-Covid in FY22 (sales grew 26% YoY) but is yet to recover to the pre-pandemic level. Thanks to the recovery in demand from construction, e-commerce, and mining sectors with gradual unlocking of the economy and higher infrastructural spending by the Centre on large projects.