Profitability of FOCs likely to remain subdued over the medium term

According to investment information agency ICRA, the profitability of foreign passenger vehicle non-banking finance company captives (FOCs) is likely to remain subdued over the medium term.

Given the slowdown in the passenger vehicle segment along with Covid-induced disruption, FOCs' credit contracted by 8 per cent year-on-year in FY20 and further dipped by 4 per cent in H1 FY21.

FOCs are an important constituent of passenger vehicle financing among NBFCs. Captive financing provides a competitive edge, especially in the luxury car segment, by offering low-cost credit and innovative financing models.
It also plays an important role in inventory and long-term financing for dealerships which supports dealer's financial flexibility due to relatively low sales volume of foreign original equipment manufacturers in India.

Manushree Saggar, Vice President and Head of financial sector ratings at ICRA said that the challenging macroeconomic environment, Covid-19 pandemic-related lockdown as well as overall slowdown in the passenger vehicle segment along with cautious stance of FOCs towards wholesale lending led to a contraction in FOC credit in FY20 and H1 FY21.

"However, ICRA expects recovery for NBFC passenger vehicle credit in FY22 with an expected credit growth of 3 to 5 per cent year-on-year. While market share of FOCs is expected to remain low in the overall NBFC passenger vehicle credit, growth may look optically higher for FOCs due to low base," she said.

With a relatively higher contraction in luxury car volumes compared to overall passenger vehicle sales, the share of FOCs declined to 22 passenger vehicle of NBFC passenger vehicle credit as on September 30, 2020 from 25 per cent as on March 31, 2019.

In terms of portfolio mix, these FOCs are majorly retail focussed and share of dealer or channel financing has gradually been declining over the years as FOCs became more cautious amid rising delinquencies in the dealer segment.