New rules on vehicle financing will shrink NBFI margins – analysts
View(s):New rules on vehicle financing will see the smaller Non Bank Finance Institutions (NBFI)’s in a difficult position to compete with larger NBFIs likely to lose market share to the large commercial banks, analysts say.
“The law of unintended consequences might play out where the smaller NBFIs who do not have a diversified business model and who have higher cost of funds may be forced to consolidate to remain competitive,” Murtaza Jafferjee, CEO JB Stockbrokers says. There have been many measures taken by both the Central Bank (CB) and Ministry of Finance over the last 30 days to curb vehicle imports.
Typically, a leasing company would assess the forced sale value of a vehicle and lend up to 90 per cent of this value. Most leases are for five years comprising equal installments but there are variants such as structuring the monthly payments on 70 per cent of the value of the lease and the residue to be paid at the end, Mr. Jafferjee says. The CB issued a circular effective 15 September 2015 placing a 70 per cent loan value cap with the objective of limiting the amount of credit flowing into vehicle leases aimed at ensuring that this would result in a fewer number of vehicles being financed. Monetary regulators the world over do place caps on lending against asset classes, the most obvious one being on real estate, so what CB did was not extraordinary.
“The media carried a statement made by the finance minister (FM) that the LTV cap would be scrapped since it affects the financing of registered vehicles and instead a 100 per cent LC margin will be imposed (policy measure focused on the supply side). One would presume that the FM’s statement was more a wish or request to CB for the Central Bank comes under the Prime Minister. To my knowledge thus far there has been no revocation of the LTV cap directive and is unlikely to be revoked in the near future.” Mr. Jafferjee explained.
He said that one ideally would want a free market but sometimes it necessitates intervention either in the case of market failure or is overheated (as in this case) but intervention invariably leads to distortion. Some finance companies are making the argument that LTV caps should not applied to registered vehicles for these units are already in the country, this is a deeply flawed logic for product markets are all linked.
Not all buyers of unregistered vehicles are first time buyers, a majority of them would either be replacing a vehicle or upgrading to a higher category thus their affordability is driven by the resale value of their existing unit. “Since the policy measure is to dampen affordability, one cannot only restrict it to unregistered cares for credit flowing to registered vehicles would increase their value which in turn would increase affordability of unregistered cars,” Mr. Jafferjee said further. He said that a serious problem with the LTV rule is that it significantly disrupts the vehicle financing market place.
A firm in this business has four levers to compete with – interest rate on the lease, geographic distribution, sales intensity and taking higher risk by lending to a sub-prime customer – poor credit history or no evidence of formal income or low quality of collateral, Mr. Jafferjee says. “In the case of the latter under the LTV rule the credit cost would come down significantly – the historical loss given default rate for the leasing industry has been around 40 per cent from the point of default based on a LTV rate 90 per cent this would probably decline to less than 10 per cent and the probability of default would also reduce. Thus a strategy based on targeting a riskier segment is not possible; most firms will only be left with three levers – cheaper interest rates, sales intensity or greater distribution reach.” Data showed that brand new car registrations recorded 9,183 units in September significantly up from 5,216 units the prior month and a mere 980 units 12 months ago. This is a 940 per cent increase in 12 months and 76per cent increase over the previous month.
Small cars (1,000cc) accounted for the 8,891 units (97 per cent). Maruti accounted for 7789 units (85 per cent) in September up from 4259 the previous month (83 per cent increase) and mere 564 units 12 months ago (1380 per cent increase). Micro recorded 639 units (mainly panda) up from 441 units the previous month and 152 units 12 months ago. Hyundai recorded 228 units mainly comprising of Eon.
Tata’s Nano Twist is gaining traction but volumes are yet low at 127 units. Financing share recorded 68per cent up from 64per cent the previous month. It’s noteworthy that Maruti Alto Financing share was 68 per cent in September up from 61.7 per cent in Aug in Spite of the 70 per cent loan to value cap coming into effect on 15 September.