About the Author:
Mr. B. Raj has worked with leading NBFCs and automobile companies in India & abroad. He has done extensive research (at doctorate level) in the area of marketing (automobile consumer behaviour). He has been associated with leading business schools in India & abroad.
I have seen closely and felt the rise and fall of NBFCs in India. There was a time (in the ‘80s) we used to lend money at 40% IRR and operated in a sellers market i.e. there was acute shortage of commercial vehicles and non-availability of finance from the banks. Those days the credit appraisal was limited to assessing the hirer’s ability to make the down payment (usually 20% of value) only. Customers (hirers) would sign blank agreements, pay hefty service/ finance charges, and were made to visit the financier’s office to collect the D.O. (Delivery Order) everyday. After making a numbers of visits, customer would get the D.O. from the financier’s office. This was the time when banks were reluctant to lend money to the transporters. NBFCs had taken full advantage of this situation and made above average profits by financing commercial vehicles. I would like to mention at least two NBFCs, MGF in New Delhi and GNB in Kolkata (Calcutta), which could identify this opportunity and developed expertise to make money by taking calculated risks in financing commercial vehicles. The supply and demand gap and the resulting price hike helped these NBFCs to set off their risk in lending money to transporters (mainly the one/two vehicle owners). If a hirer became a defaulter, the NBFC would repossess the vehicle and refinance it to another customer or would sell the vehicle to recover its dues. NBFCs never incurred any losses in selling a repossessed commercial vehicle due to the shortage of vehicles in the market & price hike. Many of you will not believe what I have experienced in a sellers market. Can you imagine reputed vehicle manufacturer like Telco (now Tata Motors) could deliver the heavy commercial vehicles with four wheels and many a times without battery/fuel pump/spare wheel? The customers were at the receiving end and had no option but to accept the situation.
The two Heavy Commercial vehicle manufacturers (Tata & Leyland) both realized the situation and augmented their production capacities to meet the demand. While Telco focused on medium commercial vehicles, Leyland concentrated on heavy (multi axled) commercial vehicles. In the mid ‘80s, the arrival of Japanese LCVs in India inspired both the domestic manufacturers to produce LCVs. This not only affected the freight market, but redefined the commercial vehicles market also. The demand for medium commercial vehicles started shrinking and the demand for LCVs & HCVs started growing. Initially Telco capitalized on LCVs and Leyland on HCVs. But soon they realized their mistake. Telco introduced multi-axled vehicles (2213 range) and Leyland introduced LCVs (Cargo series). This accelerated competition in the commercial vehicle market. Severe marketing war started between the two manufacturers to gain the leadership in commercial vehicles market.
The availability of finance/loan has always been the key factor responsible for sale of commercial vehicles. Accordingly Telco made a strategic move to make the finance/loan available to the transporters through its four channels. First, Telco started its own finance division (known as Telco-BHPC), Second Tata Finance, Third a joint venture NBFC with its leading dealers (known as TDLF), and fourth a joint venture with MGF (known as JCL) mainly to finance Tata-Hitachi excavators. This strategy worked successfully and Telco could retain the major chunk of the market share in LCV & MCV segment. On the other hand, Leyland could manage its sales through its own NBFC (known as ALFL) and its alliance with NBFCs like Sundaram & Cholamandalam finance. Leyland lost LCV & MCV competition to Telco. The market share of Leyland was not enough for Sundaram & Cholamandalam to justify their existence as NBFCs, therefore these NBFCs also started financing Tata vehicles for their own survival. Being the only manufactures of multi-axled heavy vehicles Leyland could maintain its leadership in this segment. The other technical reason for transporters preferring Leyland multi-axled vehicles was that Telco multi-axled vehicles had dummy axles, which were not popular among the transporters. Many NBFCs continued to grow during this period. I know of two senior executives of Citi Bank who left the bank and started an NBFC (known as 20th Century finance), which was also successful.
Continued in Session 2 and Session 3