How Perpetuity Capital is redefining auto finance with technology

Karamveer Singh Dhillon, co-founder and CEO of Perpetuity Capital

1. How did Perpetuity Capital carve out a niche for itself in the auto finance industry and can you tell us about the platform and its offerings?
Perpetuity Capital was established with the aim of providing automotive financing to the unbanked and informal sector of the economy. The Company primarily focuses on the financing of commercial vehicles, personal vehicles and used personal vehicles. The company offers loans to customers at reasonable interest rates with flexible term loans. Our technology with its simple and user-friendly UI/UX makes the entire loan application frictionless for borrowers. Our integrated APIs on the backend and our data science team verify documents and process loans within 48 hours. We hope to make the entire loan application process from origination, verification and disbursement; transparent for our customers.

2. How big do you think the auto/CV (commercial vehicle) finance market is in India, where do you see yourself in relation to that? (Describe from small and large CV PoV)

Total Vehicle Finance Assets Under Management (AUM) is pegged at USD 100 billion or Rs 7.6 trillion and is expected to grow by around 8% year-on-year. The share of VC in total vehicle finance AUM is over 40%, which translates to around USD 46 billion or INR 3.4 trillion. The balance of USD 64 billion/INR 4.8 trillion is the share of passenger vehicles in AUM. NBFC’s share of total vehicle finance assets under management is 50%. NBFCs control 90% of the used CV financing market and 80% of the used PV market. Used vehicle financing is where we believe we can disrupt the status quo and create a niche for ourselves by offering a transparent credit facility.

In FY21, more than 3.8 million used PVs were sold, compared to 2.7 million new passenger cars. We expect India to follow in the footsteps of developed economies like Germany and the UK, where used cars account for over 70% of total PV sales each year. We expect to see similar trends in the used CV market as prices for new CVs have risen by more than 15% due to the implementation of BS VI emission standards. Additionally, we are extremely bullish on the used CV space given that on average a vehicle changes hands 2-3 times during its life cycle. In particular, we focus on MCV and LCV because there is a possibility of higher returns and the loans are smaller.

3. The automotive finance landscape is changing with the introduction of commercial electric vehicles, what trends have you observed so far in loan applications and processing?
FAME, or Faster Adoption and Manufacturing of (Hybrid and) Electric vehicles, is India’s flagship program for promoting electric mobility. Currently in its 2nd phase of implementation, FAME-II has been implemented for a duration of 3 years, eff. April 1, 2019 with a budget allocation of 10,000 Cr. Despite government efforts, the transition to EV adoption has been slow and cautious. In 2021, over 325,000 EVs were sold in India, which only accounted for about 1.3% of total vehicle sales. We have noticed that customers are hesitant to switch due to uncertainty in battery life, range per hour, charging time, charging networks, resale value of the vehicle and finally limited financing options. Currently, a handful of NBFCs provide financing to purchase electric vehicles, but charge exorbitant interest rates ranging from 20% to 36% per year. The reason for the lack of funding is that there are hundreds of electric vehicle manufacturers in India and most of these manufacturers sell their products under their own brand. As these are not established brands, the actual selling price of these vehicles differs from the MRP shown. NBFC struggles to assess the warranty value of these vehicles. Additionally, as electric two- and three-wheelers (L3 segment) continue to drive EV volumes in India, most loan applications come from the informal sector. They are mainly first-time buyers who have little or no credit history so it is difficult to assess the financial credibility of the borrower. Therefore, in the event of default, repossession and legal costs may exceed the resale value of the underlying asset; given that two-wheelers and three-wheelers account for more than 90% of electric vehicle sales in India.

4. Do you think rising fuel prices will affect borrower and lender profits/performance? What is the overall impact on the industry that you can assess? – (example: the ability of borrowers to adequately meet rising fuel costs in the short term would remain critical, assets under management (AUM) of non-bank financial companies (NBFCs) financing commercial vehicles are expected to increase by 7 to 9% in the current fiscal year with the recovery of overall economic activity)
The cost of fuel represents 85% of the operating cost of a commercial vehicle operator. In the short term, escalating fuel costs will affect margins and profitability for a CV driver or fleet owner/borrower. However, the cost of transport and mobility evolves along with the cost of fuel. This cost escalation will eventually be passed on to the end consumer who will see an increase in transportation costs and subsequently to household goods. In the longer term, the persistent increase in fuel prices will weigh on the pockets of every household and borrower. Additionally, prices in all areas, including daily consumables, would increase as transportation costs increase. This will obviously have an impact on GDP as consumer demand will slow. Growth of the commercial vehicle finance industry is driven by factors other than fuel costs (i.e. regulation, replacement demand, e-commerce, etc.); however, we could see a very different picture a few quarters later and keep an eye on the inflation numbers.

5. Has loan securitization volume revived in the CV segment in your view? Do you have any observations/data to suggest the same or otherwise.

Securitization consists of bundling different types of loans such as mortgages, car loans or personal loans and selling them to investors through a direct assignment (DA) or a certificate of passage (PTC) which helps the original creditor free up cash to reinvest in new loans. The total value of loan assets securitized by Non-Banking Financial Companies (NBFCs) including Housing Finance Companies (HFCs) increased by around 43% in the last fiscal year FY22′ to Rs 1,25,000 crore, driven by a rapid economic recovery and limited disruptions due to COVID-19. This represents a significant increase from FY21, when securitization of loans by NBFCs and HFCs amounted to Rs 87,300 crore. According to credit rating agency ICRA, securitization volumes are expected to touch the pre-Covid level of Rs 2 lakh crore in the financial year 2023-24. We do not have specific information on the CV segment, but auto loans, which include CV loans, accounted for one-third of securitization through PTC or 13.5% of total loan securitization amounting to 16,000 crore .

6. Regarding the changing landscape (policies) of NBFCs in India and changing type of borrowers – which are largely drivers in case CVs do you see yourself developing in a certain direction, or any other growth plan you might have in mind?
We see used automotive/commercial vehicle space financing as a very exciting place given that the industry is going through a tectonic shift right now. With the adoption of Fastags, electronic invoices, electronic signatures, gas cards, tracking software, telematics, digital wallets, among other digital tools; we have found that even a single owner driver now leaves a significant digital footprint that allows us to better understand the borrower’s financial needs and credibility. In the future, we want to venture into other forms of secured SME lending. We estimate that the 63 million SMEs that contribute nearly 30% of India’s GDP are underserved by conventional banks and NBFCs. According to an IFC report, the credit gap in the MSME sector is $397.5 billion.

7. In terms of technology, does Perpetuity Capital use technology in any way within its platform?

Perpetuity Capital operates on hybrid models (both offline and online) for obtaining loans. At the moment, a physical aspect is required as we need to verify the value of a used vehicle and the audit team needs to determine its underlying value. With newer vehicles, this issue is usually alleviated. However, other than that, we use technology for loan origination, document collection, document verifications and loan disbursements are all digital. We are also exploring ways in which telematics can help us better understand vehicle conditions and other driver habits. Next month our updated mobile app will be available for Android and iOS mobile phones.

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