In the truck and bus industry, we have always heard and read stories about fleet operators possessing ‘x’ numbers of vehicles. While we have always focused on the fleet operators’ business model, and their ways to efficiently utilize the vehicles they buy, rarely do we focus on how they buy these commercial vehicles. Commercial vehicle financing or leasing vehicles plays a crucial role in a fleet operators’ business, and hence in this special feature we try and decode the purpose of vehicle financing and the methodology through which some of the important financial institutions in the country helps fleets to get going.
Any individual, a partnership firm, proprietorship firms or a medium and small enterprise requiring funds to run commercial vehicles that are engaged in transporting goods which is why people seek commercial vehicle loans. A commercial vehicle loan can be taken for a variety of commercial vehicles, which may be used at different locations, right from buses, tippers, transit mixers to any other medium and heavy, light or small commercial vehicle. Mostly all the private banks have a separate team/division handling the commercial vehicle finance. There are also a lot of Non-Banking Financial Companies (NBFCs) that lend money.
While the loan amount can vary depending upon the specific requirements, funding can extend to 100 per cent of the chassis and body funding can be extended on special requirement and based on the financier’s past experiences with the customer. The minimum loan amount which can be availed by for small players is as low as Rs. 5 lakhs, while the same for large corporate is up to Rs. 10 crores or more. The time taken for sanction of loans will largely depend on the quantum of funding, with the bank or financial institution disbursing the amount directly to the vehicle dealer and not to the borrower.
Sharing his views on the topic, Mr. Rajnish Agarwal, Senior Vice President – Operations, Mahindra & Mahindra Financial Services Ltd., said: “We work with all the major dealerships in the country, but in the CV industry, lending to the transport fraternity has always been on basis of their fleet, work in hand, track record, profile, years in business, etc. For LCV and SCV we work through products/dealers as they play a role in establishing credibility of the customers through their sales team.”
Like the loan amount, even the interest rates range from 10 to 15 per cent depending on the customer and the vehicle segment. The rate depends on a lot of factors such as the number of vehicles owned by the borrower, his business turnover, repayment track record from other financiers (if any), etc. The financial institutions can confirm the rate of interest once they have studied the documents and it may be fixed or variable.
“The range is a function of the profile and background of the customer. We disburse close to Rs. 3,500 crores per annum and hence the schemes we offer are dynamic for the quantum of funding. Our rates are based on the profile, relationship with customers as well as on the credit risk profile of the customer. Our CV re-finance rates are 150 to 200 basis points higher than new vehicle financing rates,” revealed Mr. Agarwal.
Current sentiments
Leaving behind the trails of demonetization and cyclical slow down, the M&HCV cargo segment has picked up due to pre-buying and because of expected price increase led by BS-IV implementation from April 1. Even the ambiguity over the implementation of the Goods and Services Tax (GST) has not slowed the demand and seems to have instead provided a much-needed boost post-demonetization.
“The difficulties of demonetization are already behind us. Recovery has improved with improvement in the cash flow. We are seeing an increasing trend of electronic/non-cash payments from our customers which could reduce our cash handling costs. Though November and December were bad as far as the loan offtake was concerned, January onwards the demand has increased because of pre-buying owing to the pan-India implementation of BS-IV. Q4 sales and finance is expected to be a lot better than Q3,” opined Mr. S.V. Parthasarathy, Head – Consumer Finance Division, IndusInd Bank.
Clearly, the implementation of BS-IV has given a thrust to the commercial vehicle segment, and as expected pre-buying was on a high in February 2017 due to the April 1, 2017 deadline for the implementation of BS-IV norms. A look at the sales figures of major CV OEMs for February will give us a clear indication of the upward trajectory of the segment.
Megatrends
Given the cyclical nature of the commercial vehicle industry, a fleet operator must factor in a lot of aspects. The first and foremost are a sound business model, operating cost, expected orders, volatile conditions and the ability to be able to repay the loan amount. Second, banks and NBFCs not only look for a transporter’s present status but also the ability to sustain business in future. It is the utilization of the vehicle that will determine the ability to pay-back. “We do not have much emphasis on the history of the prospective customer but do emphasize on his prospects and the business planning. We ensure that enough equity is brought into the business by him to keep the risk up to manageable levels,” said Mr. Umesh Revankar, Managing Director & CEO, Shriram Transport Finance Company Ltd.
Some lending institutions also target drivers who want to start their own business and calculate the experience that they have in the field. Such driver-to-owner transition is largely seen in the small commercial vehicle space. “We look at the potential drivers, from transport hubs and check if somebody is willing to progress. Sometimes the leads are provided by the dealers that we are in touch with. The network with dealers helps us as well as transporters whose vehicle demands are mostly for replacement. If we give them the right deal they will stick with us, and hence we try and reach the right customer and disburse the amount to one who can not only repay but also enhance his income,” informed Mr. R. Balaji, Vice President, Marketing & Strategy, Mahindra & Mahindra Financial Services Ltd.
Mr. Agarwal added: “The most important aspect that we look for is the involvement of the owner, his knowledge and experience about the industry that he is operating in. It is not about how many years he has been in the business but more about how prepared he is to handle the cyclical nature of the business. It differs with customer segmentation. For small and retail operator, we mainly validate their association with local transport operators, application of the asset and route viability. The customer’s experience in CV operation helps us in taking the funding decision.”
Leasing CVs
While going for financing options is one route, there is another way to increase fleet size and expand business. If a group or an operator does not want to loan vehicles on his book of accounts, they can pool in vehicles through leasing. Mr. Suvajit Karmakar, CEO, ALD Automotive India, a leading firm in vehicle leasing solutions, said: “There is a good opportunity in leasing vehicles. The lease option is not explored, particularly in the LCV segment. To tap this opportunity, ALD Automotive India had started a separate vertical for LCV leasing. Currently we are leasing to all type of corporate and SME customers for various kind of usage. Our business model is to give out vehicles on a long-term lease contract. In our pricing, interest is just one of the many factors; pricing also factors in the residual value and the cost of service. Overall, we offer a complete value to the customers. As a package, leasing works out better on the cash-flow compared to going for a loan.”
Having heard the above opinions and insights, we can deduce that there is clearly no constraint when it comes to rationing money and resources. Fleet operators must plan smartly, amid the cyclical and volatile nature of the industry, and analyze the margins before plunging into leasing or financing. The CV business is very unique and one needs to stay in the business for the long-term to see results. Clearly some banks and institutions will also evaluate the brand of trucks and buses that a fleet operator may choose to buy since they also factor in the re-sale value and quality of the vehicle. Amid all the facts, there is no denying that there is a lot of money chasing a lot of borrowers.