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 Credit rating agency CRISIL Ratings Ltd on Thursday said the vehicle financing assets under management (AUM) of non-banking finance companies (NBFC) would rise to Rs 8,10,000 crore by March 31, 2025.

According to CRISIL Ratings, the NBFC’s vehicle financing AUM will touch Rs 8,10,000 crore from Rs 5,90,000 crore as on March 31, 2023.

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, CRISIL Ratings said.

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

“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,” said Ajit Velonie, Senior Director, CRISIL Ratings.

“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 uneven monsoon,” Velonie added.

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 about 40 per cent from about 33 per cent in the past four years, the credit rating agency said.

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 plus days past due (dpd) improved by about 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 plus dpd should improve by about 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 about 720 bps decline in the 30 plus 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.”

Improved asset quality across major segments will keep overall credit costs under control, supporting profitability. This is despite the expected marginal compression in NIM because of higher borrowing costs.

Interest rate on loans from banks could increase by 25-50 bps owing to recent measures by the Reserve Bank of India (RBI) to increase risk weights for lending by banks to NBFCs. The extent of balance sheet impact will depend on the proportion of bank funding in the borrowing mix and priority sector assets. At the same time, vehicle financiers will need to maintain higher risk weights for top-up loans extended against movable depreciable assets.

That said, the impact of RBI measures on vehicle financiers will be limited. Overall, return on managed assets is projected to remain range bound at 2.0-2.2 per cent over the next two fiscals, CRISIL Ratings said.