Financial Services

Riding the growth wave in 2W financing

14 Apr 2025

India’s systematic retail credit market has surged to US$ 884B in FY24, driven by the formalization of economy, growing workforce, and rising disposable income. Vehicle financing, the second-largest asset class in retail credit after housing loans, has expanded significantly, growing from US$ 101B in FY20 to US$ 172B in FY24. Within this segment, two-wheeler (2W) financing has shown the most promising growth, propelled by deeper rural penetration and widening access to formal credit.

Exhibit 1: Retail credit expands with 2Ws driving strong growth in vehicle financing

2W financing has grown 2x in four years, with NBFCs leading the charge

2W segment is the fastest-growing in vehicle financing, with the market doubling in four years. NBFCs continue to dominate, expanding their share to 68%, while banks maintain a steady 29% in FY24. Disbursements have rebounded post-Covid, driven by rising demand and deeper rural penetration

Exhibit 2: NBFCs are gaining market share by deepening penetration in tier 2+ cities

Navigating growth in 2W financing: Key demand drivers

The 2W loan book has doubled over the last four years, supported by a steady rise in disbursements, with NBFCs leading the market. This momentum is fueled by multiple factors shaping demand and financing accessibility.

Growing 2W sales driving financing demand: Sales rebounded to 17.5M in FY24, driven by rising personal mobility needs. The top four OEMs, Hero (31%), Honda (23%), TVS (17%), and Bajaj (12%), command 83% of the market, with TVS and Bajaj gaining share, signaling shifting market dynamics
Exhibit 3: India’s 2W demand rebounding to pre-Covid levels
Higher loan ticket sizes: Rising vehicle costs due to BS VI upgrades have pushed up loan sizes. Loans of US$ 0.9-1.2K hold the largest share (41%), followed by US$ 1.2-1.8K (22%) and above US$ 1.8K (14%), reflecting a shift toward higher-value financing
Strong rural and semi-urban demand: Over 60% of 2W sales come from tier 2+ cities, driven by rising rural incomes and government-led infrastructure initiatives, such as MNREGA and rapid rural road expansion (50K km in FY24 vs 27K km in FY20)
Surge in e2W adoption: e2W sales have skyrocketed from 43K units in FY21 to 946K in FY24, capturing 5.4% of the total 2W market. While internal combustion engine (ICE) 2Ws continue steady growth, e2Ws are gaining traction with government subsidies, expanding charging infrastructure, and rising fuel prices
Expanding NBFC-led financing: NBFCs are strengthening their foothold in rural markets with flexible financing options, including low down payments and processing fee waivers, driving deeper penetration of 2W loans

2W financing landscape: Balancing growth and risk in a competitive market

2W financing market is highly competitive, with banks and NBFCs expanding their reach across urban and rural regions. NBFCs, including captive, multi-line, and regional players, drive penetration by catering to higher-risk and new-to-credit customers. Their flexible approach boosts financial inclusion but results in higher delinquencies, with 11.1% of loans in the 90+ DPD category (FY24)
Banks take a more structured approach, prioritizing lower-risk borrowers through stringent underwriting. Private, public, small finance, and foreign banks focus on asset quality, keeping delinquency rates in check. At just 4% of loans in the 90+ DPD category (FY24), banks maintain a more stable loan portfolio.

Exhibit 4: 2W financing market is highly competitive, driven by multi-line NBFCs and banks

2W sales shift beyond metros; OEMs expanding in high-growth states

India’s 2W market is shaped by a few key states and OEMs, with growing demand in semi-urban and rural areas. To sustain growth, manufacturers are strengthening dealer networks and refining strategies.

Exhibit 5: Top 4 OEMs dominate the Indian 2W market with majority share coming from top 10 states

27% of India’s 17.5M 2W sales comes from just three states, driven by the top four OEMs. Uttar Pradesh leads with 13%, followed by Maharashtra at 8% and Tamil Nadu at 6%, making these regions critical for expansion.

Market concentration: Top 4 OEMs contribute towards 83% of national sales, thriving on dealer-led financing, rural expansion, and targeted product strategies – commanding a 92% market share in UP, Rajasthan & Bihar
Key state strongholds: Hero's majority sales come from UP and Rajasthan at 30% and 14%, while for Honda, Maharashtra and Gujarat contribute 18% and 15%, respectively. TVS sees a majority from UP at 19%, Maharashtra at 13%, and Tamil Nadu at 16%, while Bajaj's key markets are UP at 20%, Maharashtra at 13%, and Tamil Nadu at 11%
OEM dominance: Hero has a majority share of 51% in UP's 2W sales and 55% in Rajasthan, Honda leads in Gujarat and Maharashtra with 35% and 30%, while TVS leads in Tamil Nadu with 24% share

Exhibit 6: Top 3 states account for ~45% of Honda, TVS and Hero’s dealerships

India’s 2W market is driven by a structured dealer network, with 30,000 outlets nationwide, including sub-dealers. With the top four OEMs operating 7,200 dealerships in top 10 states, these key touchpoints shape financing decisions and lender preferences.

  Stronghold of 2W dealers in UP: UP dominates the 2W dealer network, housing 25% of Hero’s, 23% of TVS’, 17% of Bajaj’s, and 16% of Honda’s dealerships with 5% of total dealer network in India

·       Regional dominance of OEMs: Tamil Nadu and Bihar are TVS’ strongholds, capturing 46% and 43% share amongst dealerships, in respective states. Meanwhile, Honda thrives in Maharashtra and Gujarat, with 43% and 40% share in the respective states’ dealer network

·      Beyond cities, to rural expansion: India’s 2W market is shifting rural, with the top 10 states by sales holding 25% of dealerships, while the top 15 cities by dealerships having just 4% share in total dealer network, reflecting a push towards deeper market reach

What does it take for 2W financiers to win the market?
·        Sales and distribution
o   Exclusive partnerships with dealers or authorized OEMs enable financiers to gain more customers and brand awareness by establishing a monopoly in specific regions or dealer types
o   Physical presence of sales executives at dealerships helps manage the loan application process efficiently, reducing overall turnaround time (TAT)
o   Attractive incentive structure and timely payouts are crucial for being prioritized by dealers, as financiers offering better incentives are more likely to be referred over their competitors
o   Higher trade advances (TA) to dealers incentivize them to fully utilize the allocated capital, leading to more cases being directed to a specific financier
·        Customer experience
Attractive rates of interest help attract more customers, as saving on interest costs is a key priority, and dealers often prioritize referring financiers with lower rates

o   Higher loan-to-value (LTV) attracts more borrowers, as customers prefer financiers offering maximum loan amounts against the vehicle price, minimizing their upfront downpayments

o   Lower turnaround time with digital processing, by replacing physical documentation with electronic application handling, minimizing efforts for both dealers and customers

·        Operations and technology

o   AI integration in business rules engine enables faster and accurate loan decisioning by analyzing borrower profiles against lender-defined criteria, improving approval rates and turnaround times

o   Robust technological infrastructure is essential for real-time loan application processing while securely storing critical data and documents
o   Efficient collections with digital payment reminders, automated follow-ups, and data-driven risk assessment enhance recovery rates and reduce delinquencies

Final thoughts

India’s 2W financing market continues to expand, driven by rising demand and deeper credit penetration. NBFCs continue to lead the sector, expanding access but facing higher delinquency rates, reflecting a trade-off between credit inclusion and risk.

Future opportunities lie in reimagining processes, strengthening OEM and dealer partnerships, offering flexible financing, and innovating credit decisioning to meet evolving customer needs. While the sector is on a strong growth path, challenges such as high delinquency and intensifying competition must be managed to sustain momentum. With a greater push for sustainable mobility, the market’s trajectory remains promising.