Banks vs. Luxury Cars: How Financing is Fuelling Indias Affluent Car Buyers

Published: Tuesday, February 13, 2024, 8:00 [IST]

Luxury cars are becoming increasingly popular in Mumbai and across India, and people are now looking for financial products to help them afford these lavish purchases. Major banks like HDFC Bank, ICICI Bank, Bank of Baroda, Axis Bank, and Kotak Mahindra Bank, as well as non-banking financial companies and financing arms of luxury automakers such as Mercedes-Benz and BMW, are experiencing a surge in demand for luxury car loans.

This shows that consumers are now more inclined to invest in high-end vehicles due to factors like higher income, aspirational lifestyle choices, and attractive financing options.

Luxury Car Financing on the Rise

As of the end of December, outstanding loans extended by banks for personal vehicle purchases had reached a staggering Rs 5.8 lakh crore. Though specific figures for luxury car financing are not separately available, industry insiders confirm this segment is experiencing rapid growth within lenders' car loan portfolios.

This shift is largely attributed to a transformation in consumer behavior post-Covid, with affluent and higher-middle-class Indians increasingly inclined to indulge in luxury vehicles. This trend is further fueled by the rising income levels of young Indians and the introduction of the latest models by global luxury car manufacturers.

Changing Consumer Dynamics

Industry data reveals that between 60% to 73% of the purchase price of luxury vehicles from brands like Lexus, BMW, Mercedes-Benz, Jaguar Land Rover, Audi, and Volvo Cars in India is financed through loans. The average loan amount for such purchases ranges between Rs 40 lakh and Rs 73 lakh, with the prices of these vehicles spanning from Rs 45 lakh to Rs 2.5 crore.

Ravi Bhatia, President of Jato Dynamics, an automotive industry intelligence firm, notes, "As the younger population becomes more affluent and aspirational, the luxury vehicle market in India is witnessing a surge driven by changing lifestyle preferences."

Banks and Financing Companies Eager to Lend

Lenders are increasingly eager to cater to this segment, buoyed by the robust performance of the luxury car segment which has outpaced industry average growth rates. Shahrukh Todiwala, wholetime director at Kotak Mahindra Prime, highlights the influx of younger professionals with higher disposable incomes into the luxury car market. Interestingly, the demand for luxury cars is not limited to metropolitan areas but is expanding into tier-2 cities as well.

Furthermore, the luxury car financing segment enjoys lower delinquency rates compared to the entry-level and mid-size segments, attributed to the higher affordability levels among luxury car buyers. Madan Sabnavis, chief economist at Bank of Baroda, points out, "Having luxury cars is a status symbol, and people with higher income levels are willing to borrow from banks. It is the Veblen effect that has caught on."

Captive Financing Growth

Captive financing companies are also seeing significant growth in their loan books. For instance, Mercedes-Benz's subsidiary, MB Financial Services, finances 40% of the company's vehicles sold in India. Santosh Iyer, managing director and chief executive at the Indian unit of the German automaker, revealed a 50% increase in the average loan size compared to five years ago.

Similarly, BMW Group India President Vikram Pawah emphasized the rising demand for customized financial solutions, particularly among young professionals.

DriveSpark Thinks

Optimism about the future of the luxury car market in India remains high, with strong economic growth and infrastructure development anticipated to further drive and sustain sales. As luxury car manufacturers and financiers continue to innovate and tailor their offerings to meet the evolving preferences of Indian consumers, the sector is poised for continued expansion.

In conclusion, the luxury car market in India is undergoing a significant transformation, propelled by changing consumer preferences, increased affluence, and the availability of flexible financing options. As this trend continues, the symbiotic relationship between luxury car manufacturers, financial institutions, and the aspirational Indian consumer is set to redefine the contours of the automobile landscape in the country.