NBFCs do brisk business in 2005

INDUSTRY IMPACT 2005

The year 2005 has been great for non-banking finance companies (NBFCs), particularly for Chennai-based commercial vehicle financing companies like Cholamandalam and Shriram that garnered the largest investment inflows of about Rs 776 crore together made by DBS Bank, Mauritius-based ChrysCapital III and Newbridge Capital.

Tamil Nadu is the pioneer for non-banking finance companies with Sundaram Finance being one of the earliest firms to set up in 1954 to finance purchase of commercial vehicles and cars.

Traditionally, the preserve of finance companies, commercial vehicle financing for the past two to three years, has become a focus area for ICICI Bank, HDFC Bank and overseas players Citicorp Finance and GE Transport Finance Services.

It is evident now that overseas banks like DBS are picking up stake in commercial vehicle financing companies or setting up their own NBFC arm like Standard Chartered.

It is interesting to note that during 1997 when there was a massive shake out with a large number of NBFCs going under, it was only commercial vehicle financing companies that survived and proved their mettle.

Increasing role of banks
Domestic or multinational banks have either acquired or picked up stake in the leading commercial vehicle financing companies except Sundaram Finance, which merged its subsidiary Lakshmi General Finance with itself last year.

Erstwhile Ashok Leyland Finance was merged with IndusInd Bank two years ago, Singapore-based DBS Bank announced that it will pick up a 37.5 per cent stake for Rs 228 crore in Cholamandalam Investment and Finance Company in June, 2005.

UTI Bank picked up equity stake in two Shriram Group companies in 2004. Shriram group plans to merge two of its companies, Shriram Transport Finance and Shriram Investments, by the end of this year.

R Thyagarajan, chairman of Shriram group, said that while the chunk of finance for cars done by banks is much larger compared to commercial vehicles, banks have cornered a major pie of the commercial vehicle financing market.

Key drivers
The entry of banks has led to a surge in the availability of finance besides liberalisation of lending terms (such as longer loan tenure, lower interest rates and margin money), which has led to merger and consolidations in the commercial vehicle financing companies.

Most commercial owners in India are small fleet operators -- over 90 per cent of the trucks in the country are owned by operators with less than five trucks "� while around 90 per cent of the commercial vehicles sold are financed by debts. The availability and cost of debt are, therefore, important elements of the transporter's operations.

Easier availability of finance has been a significant purchase trigger, particularly among smaller fleet operators who have had little access to finance in the past. In recent times, banks and finance companies have been open to financing start-ups (first-time truck owners) in their quest for building up their retail books.

The declining interest rates over the last few years have also improved the operating economies of transporters to an extent.

According to ICRA's rating insights, a six per cent decline in interest rates translates into a 1.2 per cent reduction in the total cost (fuel plus all other fixed and variable costs) per kilometre for a transporter operator.

Advent of huge investments
In January 2005, ChrysCapital III, LLC, Mauritius, picked up a 20.6 per cent stake each in truck financing firms Shriram Investments Ltd (SIL), Shriram Transport Finance Company Ltd (STFC) and Shriram Overseas Finance Ltd (SOFL) for about Rs 100 crore through a preferential issue.

Restrained by the Reserve Bank of India from buying out stakes in local banks and spreading their branch network, foreign banks are using the NBFC route to build their asset books.

Rajan Raju, managing director, head of South and South-East Asia, DBS Bank, said, "We are particularly excited about the potential of the consumer finance business. Our experience in Thailand with Capital OK has reaffirmed our confidence to serve the mass retail market with quick and easy financing. The deal is very much in line with DBS' strategy of expanding the scale and scope of our operations across the region."

Private equity firm Newbridge Capital has decided to invest $100 million (Rs 448 crore) in the used-truck financing business in India by taking a 49 per cent stake in Shriram Holdings (Madras) Pvt Ltd.

Sundaram Finance, managing director, T T Srinivasaraghavan said increasing FDI flow was felt in all financial services sector even though it was more pronounced for the NBFCs.

Incidentally BNP Paribas Asset Management Company picked up 49.90 per cent for Rs 100.38 crore in Sundaram Asset Management, a group company of Sundaram Finance, recently.

Key trends
The vehicle scrapping age in India is likely to decline in future, given the better operating economics offered by modern vehicles and the increase in restrictions on older vehicles.

Private equity players such as ChrysCapital III and Newbridge Capital seem to have taken their cue and capitalise on this fact by investing in the Shriram group companies that specialises in used vehicle financing. Almost 1.2 million commercial vehicles plying in Indian roads are over 10 years old.

The strict emission norms' initial impact on the commercial vehicle industry may be negative. However, in the long-run the replacement cycle triggered by the norms would have a clearly beneficial impact on the commercial vehicle industry.

Outlook
Fuel costs are estimated to account for 50-60 per cent of the total operating costs of transporters. While freight rates have moved up since 2003-04 after remaining stagnant for two years, they have not kept pace with the increase in diesel prices.

Thus overall, in spite of an upturn in economic activity and hence capacity utilisation, the operating economics for a transport operator remain tight particularly in the initial three and four payments against financing have to be made.