A working group of the Indian Banks' Association has called for fine-tuning of banks' policy of direct financing purchase of commercial vehicles (CVs), both in the priority and non-priority sectors, in respect of new and second-hand vehicles.
The working group on financing the purchase of CVs, headed by R V Shastri, chairman and managing director of Canara Bank, wants banks to minimise the spread over their prime lending rate (PLR) to make borrowing attractive to small road transport operators and fleet operators.
In this regard, the group has suggested that banks' consider providing finance to non-banking finance companies (NBFCs) for on lending to transport operators at a mark up of 1.5 per cent over their PLRs.
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The panel's recommendations are aimed at tackling the declining production and sales of commercial vehicles (CVs), reviving non-banking finance companies (NBFCs) and also, to an extent, solving the issue of tardy non-food credit offtake.
The group has come up with a string of proposals aimed at exploiting the inter-linkages between the three important sectors of the economy.
The group, which has submitted its report to the finance ministry, feels that banks could consider higher quantum of finance/lower interest to NBFCs promoted by auto manufacturers if the manufacturing unit guarantees the exposure.
As costs have gone up considerably in the recent past, it has suggested a reduced margin of 15 per cent in the case of new vehicles. The group feels that a higher margin of 25 per cent may be stipulated for financing second hand vehicles, up to 5 years old, based on their valuation and road worthiness.
It said that the repayment period for truck operators may be spread over five to seven years as, in recent years, the margins available for operators have narrowed, making pay back period longer. Further, banks may provide pre-closure in case operators go in for replacement of vehicles.
The panel has asked banks' not to distance themselves from dealing with NBFCs and also increase their lending to such entities with a good track record.
Banks could consider financing NBFCs against their lending to used vehicles up to five years old against hypothecation. The banks could also develop linkages with NBFCs for pre- and post-sanction support for their direct lending portfolio.
Further, the banks' should consider participation in asset securitisation programmes of well established finance firms supported by auto manufacturers.
The recommendations of the group are significant in view of the fact that the transport sector plays an important role in the economy of the country and growth in this sector is seen as a barometer of economic growth.
There has been as deceleration in the production, sale and export of CVs in recent years. A general slackness of demand coupled with increase in the cost of vehicles, diesel prices, road taxes and other running costs have eroded the profitability of transport operations.
Drop in profit margins have increased the payback period for fleet operators with consequent drop in demand for replacement of vehicles. Increased use of pipelines for the bulk transport of oil and gas and conveyors etc. for movement of materials have affected demand for commercial vehicles.