500 cash-strapped partners help private financier tide over the crisis.
Three years ago, Deepak Dugar of Mahaveer Finance India, a Chennai-based private financier of light commercial vehicles (LCVs), had about 1,000 customers but not enough funds to service them. Today, his customer count has more than doubled to about 2,500, and funding problems are more or less a thing of the past.
Dugar gives credit to their franchise tie-up with Shriram Transport Finance for the buoyancy in business. “Earlier, funds were a major problem since banks were the only avenue and we had strict limits. So, then we couldn’t service more than 800-1,000 customers. The partnership with Shriram has helped double our business and improve profitability,” he says.
Shriram Transport Finance is one of the few organised financiers of used commercial vehicles in the country. According to its Managing Director R Sridhar, tie-ups with small private financiers are beneficial to both sides as cash-strapped small players get access to funds, while Shriram Transport gets the opportunity to tap local customer networks.
Besides Dugar, Shriram Finance has tied up with about 500 other private financiers across the country. Now, almost 10 per cent of Shriram Transport Finance’s loans flow through this channel and the firm is keen on growing its network. As part of the arrangement, the smaller partner is responsible for acquiring customers, collecting payments and pitching in with about 10-20 per cent of the loan amount. The remaining part of the loan is extended by Shriram Transport Finance. Profits or loss above the minimum internal rate of return (IRR) is shared 50:50.
Sridhar claims that innovative business models and the firm’s niche focus have helped Shriram Finance tide over the downturn that pulled down annual sales of new commercial vehicles by 29 per cent in 2008-09. Bankers corroborate Sridhar’s claim by saying that the new commercial vehicle financing industry has seen a drop of 30-35 per cent since the beginning of the year. Players such as IndusInd Bank say the year-on-year growth in their portfolios has been only 10-15 per cent. The country’s largest private lender, ICICI Bank, has shrunk its commercial vehicle loanbook by about 10 per cent in the June quarter on a sequential basis.
The country’s largest lender, State Bank of India, says unlike heavy commercial vehicles, demand for finance of LCVs has improved, driven by rural areas.
Since Shriram Finance has a strong network in rural India, the company stands to gain. It’s so because financing of pre-owned commercial vehicles rests mostly in the hands of private financiers. Banks consider this category of loans high-risk, because the owners are mini-truck operators who drive their own vehicles. Such vehicles usually ply short distances of less than 200 km and are used to transfer essential commodities.
However, 90 per cent of loans disbursed by Shriram Finance, which has assets worth Rs 24,274.87 crore as of June 30, 2009, are to this segment, which has proved relatively resilient to the slowdown.
For Shriram Finance, although the pace of growth in operating income has slowed to 23 per cent in the June 2009 quarter from 74 per cent a year ago, it is still a respectable percentage given the present economic environment. It has also managed to maintain a net interest margin, or the percentage difference between interest earned on loans and that paid on funds, of 6.5 per cent in the June quarter and restricted non-performing assets (NPAs) to 2.2 per cent of total advances. This is despite having an incremental cost of funds of 10.5 per cent—significantly higher than that for banks, which have access to low-cost retail deposits.
Shriram Transport Finance is able to maintain such strong margins because loans in the used commercial vehicles segment are issued at interest rates in the range of 18-24 per cent, while the coupon for new commercial vehicles is lower at 15-16 per cent. Pricing pressure from competition is not an issue because the only other players in this segment are private financiers, who lend at rates as high as 30 per cent.
However, Sridhar says the firm’s objective is not necessarily to increase margins, but to bring down the cost of financing for his customers.
“We lend to a segment which has no banking habits and no one else in the organised sector is willing to lend to them because they are considered extremely risky. We encourage our customers to become bankable and upgrade to new vehicles so that they can access cheaper financing from banks,” he says.
