Wednesday, July 25, 2007

the growth prospects & the role of Non-Banking Finance Companies (NBFCs) in financing commercial vehicles/ construction equipments-Continued..

To view the first post on the same visit Session 1

Industrial slowdown and low agricultural output affected the sales of commercial vehicles adversely. Around this period CRB scam was unearthed which resulted in the downfall of NBFCs in India. People lost confidence in NBFCs and started withdrawing their deposits from them. These deposits were put with the banks though the banks were offering lower rates of interest. Many NBFCs could not refund the deposits to their customers and they disappeared suddenly. RBI intervened and set guidelines for NBFCs for refund & closing of NBFCs. Almost five lacs people working with/for NBFCs lost their jobs. Banks were flooded with funds. Eventually, Interest rates went down. Many professionals who had experience of working with NBFCs joined banks, and banks started financing commercial vehicles at lower rate of interest.

1991 Liberalization policy of Govt. of India fueled the process of industrialization in India. As a result, the demand of commercial vehicles further increased. Many automobile companies have now started manufacturing commercial vehicles. The business opportunity is so huge that a Tea Estate Company from the eastern part of country diversified and has set up manufacturing unit in Gujarat to manufacture commercial vehicles. Presently there are nine commercial vehicle manufactures in India producing a wide range of commercial vehicles. Banks have started financing the commercial vehicles in a grand way. Very few NBFCs have survived. Earlier the competition was among NBFCs, but now the competition is among the banks. Now, money lending (vehicle finance) is the main business for most of the banks.

How NBFCs can compete with the banks? The banks offer lower rates of interest, which NBFCs cannot match. Today, it is very difficult for an NBFC to sell finance to potential customers (fleet owners/ transporters) who have easy access to bank finance. Why should a transporter take finance from an NBFC at a higher rate when he is able to get the same from the bank at a lower rate? In other words, only those transporters will take loan/finance from an NBFC who are unable to take any loan/ finance from the banks. Now, the question is – if an NBFC has to continue in this business, which customer segment should it target and how it should market (sell) the loan/ finance?

I think it would be appropriate for you to first understand what is commercial vehicle financing? How does it differ from other financing say car financing for an example? Then I will talk about marketing strategy for NBFCs. Commercial vehicle finance is more or less like industrial finance. The borrower is primarily concerned with the “commercial value” of the loan/finance. Commercial vehicle or construction equipment is like an industrial unit. The borrower will make the profit first from the unit/ vehicle and then he will repay the loan/ finance from the profit. In case of car finance, the borrower repays the loan/finance from the savings. The car customer may seek “social and/or convenience value”. In business management language, a transporter takes the loan (financial resource) to buy the commercial vehicle/ construction equipment (technical resource/ machinery), and he operates the vehicle (combines these resources with his capabilities) to make money/profit. Therefore, in order to be successful in transport business, a transporter must have the adequate financial (loan/ finance), appropriate technical (vehicle/machinery) resources, adequate capabilities, and the expertise to combine the resources with his capabilities in a unique manner to make profit. We as financiers have to consider four things while appraising a loan/finance proposal for commercial vehicle/ capital equipment.

Whether the financial resources (loan/finance amount) are adequate or not?
Whether the technical resources (commercial vehicle/ capital equipment) are appropriate or not?
Whether the hirer (transporter) has the required capabilities (can operate the vehicle) or not?
Whether the hirer has the expertise (experience in transport business) to combine the resources with his capabilities in a unique manner to make profit or not?

I have practiced this method of commercial vehicle loan appraisal and I have never failed in my assessment. As an example, I would like to share with you my experience that I have on this issue of loan/ credit appraisal. There was a small transporter who had three Tata vehicles and the Tata Finance financed all these vehicles. He purchased another Tata multi-axled vehicle through Tata Finance but he was unable to pay installments in time. He became a defaulter and ultimately the Tata Finance repossessed his vehicle. He sold one of his vehicles to settle the loan account with Tata Finance. After sometime he again approached Tata Finance for loan to buy a new vehicle. Tata Finance rejected his proposal considering his track record and declared this transporter as “Sick Party”. This transporter approached other NBFCs but no one was willing to finance this transporter because of his image as a defaulter. One day he came to see me in my office. He showed me the proposal file with remark “Sick Party – Proposal rejected” written on it by the Tata Finance official. He explained to me his situation and requested me to consider his case. I appreciated his honest approach, as he did not hide anything from me. I heard him and then analyzed his case (failure to repay the loan) on the following four criteria:

1) Whether the transporter had adequate financial resources (loan amount) or not?
I found the amount of loan/finance given to him by the Tata Finance was sufficient.

2) Whether the transporter had appropriate technical resources (commercial vehicle) or not?
I found that the Tata vehicle that transporter had purchased was not meant/ suitable for the application transporter had used for. Commercial vehicles are designed for specific applications and therefore careful selection of right vehicle is very important for the success in transport business.

3) Whether the transporter had the required capabilities (can operate the vehicle) or not?
I found that the transport belonged to a community, which dominates transport business in India. People belonging to this community usually have high entrepreneurial skills.

4) Whether the transporter had the expertise (experience in transport business) to combine the resources with his capabilities or not?
I found that the transporter had the expertise to manage the transport business.

Next Session(Session 3)

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