I understood why he failed and became a defaulter. He failed because he chose wrong vehicle for his transport business. But the question is – how an experienced transporter like him could make a mistake in choosing a vehicle? I tried to find out the answer from him. He told me that Tata Dealer had given huge discount on this vehicle and Tata Finance had financed 90% and took 10% only towards down payment. Probably the discount given by the dealer lured him to buy the vehicle. Dealer certainly had achieved its sales target by selling the vehicle to this transporter but what Tata Finance got from this business transaction? In my opinion, Tata Finance failed to appraise the loan proposal and they themselves converted one of their good customers into a defaulter.
I decided to finance this transporter on one condition that he will buy the vehicle, which I will select for him. He had no option but to agree. When I financed this transporter, many of my friends in NBFCs including Tata Finance were surprised. In fact, the Tata Finance official when he met me in our association meeting asked me how I could finance a sick party. I told him that the transporter did not look like a “Sick Party” to me. I considered the transporter as “Sikh Party” and therefore approved the loan. My assessment about this transporter proved correct later on. This transporter not only paid all instalments on time, he took loan for four more vehicles from us. I helped him grow from a small transporter to a large fleet owner while we made profit all along. Later on Tata Finance approached him and offered him loan at lower rates with 90 days moratorium period but the transporter refused to accept the offer. I would like to draw your attention to the learning outcome of this case. If you want to do the business with customer then you must understand customer’s business first. Please remember if you provide your customer a “win-win” situation, you will never fail in your business. You will grow with your customers.
I will now talk about the marketing strategy for how NBFCs can compete with banks. You all have studied marketing, and therefore I need not tell you how to begin. I think it would be appropriate to understand the business environment prior to formulating the marketing strategy. Cumulative sales of commercial vehicles in the domestic market for the fiscal year were 1,07,745 nos., an increase of 57.8% over the corresponding period last year. Cumulative M&HCV sales stood at 62,201 nos., an increase of 52.8% over the previous year while LCV sales for the period were 45,544 nos., an increase of 65.4% over the previous year. Export of Commercial Vehicles increased by 36% to 40,581 units in the 2005-06 as compared to 2004-05.
According to the Economic Survey of Government of India, the Automobile Industry is growing very fast. Commercial vehicle market is also likely to grow very fast. Let’s consider some of the factors that may affect the growth of commercial vehicle market. Golden Quadrilateral project, which is near completion, will certainly enhance the demand of HCVs particularly the multi-axeled heavy vehicles. On the other hand Indian Railways Freight Corridor project will reduce the demand of HCVs particularly the multi-axeled heavy vehicles. According to the proposed project plan, the first phase of freight corridor (2,800 kms) will connect New Delhi – Mumbai and New Delhi – Howrah. The proposed freight corridors of second phase are Howrah – Mumbai, Howrah – Chennai, Mumbai – Chennai and New Delhi – Chennai. If both these projects (GQ & FC) are implemented by the year 2010, what would happen to commercial vehicle market? New Delhi-Mumbai is one of the high-density transport corridors of India, and rail as well as road capacities are fully stretched on this route. On an average, a total of about 9,000 loaded trucks move over this corridor every day. The proposed dedicated freight corridor would support 15,000-tonne trains with 30-tonne axle loads. This will affect the HCVs demand adversely. However, the main constraint of the proposed system is that the freight corridor network will neither be connected to centres from where goods originate nor will it be linked to their final destination points. In other words, to be successful, the freight corridor network will need feeder services to connect it with both goods originating centres like ports or factories/ market and final destination points where the goods are consumed. Therefore, the demand for HCVs will be affected but not drastically. Freight corridor is least likely to affect the demand of LCVs & MCVs. As a matter of fact, I would like to tell you that the freight corridor project provides huge business opportunity to NBFCs to finance an “integral component" of this project and make profit but I will not go into the details of this. I think I should discuss the topic given to me.
Now, let’s come straight to the STP. Which segment NBFCs should target? Segment A - established fleet owners who have access to the bank finance or Segment B – Individual operator/ small transporters (one/two vehicles owners) who do not have access to the bank finance. NBFCs may choose to operate in a particular segment or both the segments. I think you do not need any tips from me, if NBFCs decide to operate in segment B only. If NBFCs decide to operate in segment A, then we need to discuss the strategy. How they can compete with banks? How they will position their products (loan/finance) in this segment? Can an NBFC match the rate of interest offered by the banks? The answer is NO. So, how to sell the finance/loan to segment A? I am asking you, can we use differentiation here? Can we apply the concept of “total value approach”? Yes you are right, we can, but it is not all that easy. NBFCs will have to do a lot of homework to prepare the ‘total value” of finance so that they can differentiate their offering with that of their competitors (banks). NBFCs need to identify something, which their competitors (banks) cannot do but an NBFC can. Banks can sell the finance only whereas NBFCs can sell finance as well as vehicles. When I was working with MGF I realized our core competence – our expertise to market commercial vehicles. Using our core competence we successfully created sustainable competitive advantage (SCA) in the finance (loan) market. Besides being an NBFC we were Telco dealers also. We not only marketed Tata commercial vehicles but we financed them also. In a sellers market this was a great competitive advantage for us. It takes the same amount of efforts, time, energy and cost to sell the finance (loan) and the commercial vehicle. NBFCs can become the marketing arm of the commercial vehicle/ construction equipment manufacturer through a strategic alliance. The financial gain from the manufacturers can be used to structure the offering (finance/loan) to customers at competitive rates and probably can be matched with banks rates in terms of total value. Signing an alliance agreement with a manufacturer is easy job but the implementation of this is not all that easy. NBFCs will have to develop a marketing team of professionals who can sell commercial vehicles (construction equipments/ capital goods) as well as finance in a highly competitive environment. Developing, motivating, managing (retaining), and leading a technical sales force is a highly skilled job. Selling commercial vehicle/ construction equipments finance/loan is like selling projects. One must have the knowledge of commercial vehicles/ construction equipment, its standard operating condition, cost & return, operating condition, cost & return under the given business situation, and viability in terms of ROI. Accordingly, commercial vehicles & construction equipments loan appraisal & disbursement decisions are made. I would to share with you my experience as an example that will help you understand importance of product knowledge in financing. We had financed a Tata-Hitachi excavator to a Mumbai based construction company for their project in Karnataka. This company got another Tata-Hitachi excavator financed from us for its new project (gypsum mining) in Rajasthan. Though I had approved the loan proposal, I told my branch manager that this party will have difficulties in making repayments during the period May – July and therefore he should inform the party in this regard. He got little surprised and asked me had I seen the party’s horoscope. I told him I had not seen the party’s horoscope but I had seen the excavator’s horoscope. My prediction came true and my branch manager asked me how I could predict so correctly. Then I explained him the meaning of excavator’s horoscope (i.e. operation manual). Those days Tata-Hitachi excavators were fitted with simple 697 turbo engines which had many limitations. During the period May-July temperature around the gypsum mines area (near Sikar) goes up to 48-50 C which affects the hydraulic mechanism of the excavator. Therefore this excavator can be operated at nights only during this period. Obviously, this limitation of operation had great impact on party’s earnings from this excavator. It is clear from this example that the expertise in selling excavator facilitated the loan proposal appraisal & management process. Many NBFCs (like MGF, SFL, CFL etc.) have been doing this and are successful.