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Vehicle finance - IBANK

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IBANK, EPM, BPM, OBIEE, HYPERION, OFSAA

IBANK, EPM, BPM, OBIEE, HYPERION, OFSAA

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  • 1. Present Scenario of Commercial Vehicle Financing in India & Road Ahead Presented by : RAMAN AGGARWAL Senior Vice President & Head – Corporate Affairs Email: raman.aggarwal@srei.com © 2014 Srei BNP Paribas – All Rights Reserved
  • 2. NBFCs' Perspective © 2014 Srei BNP Paribas – All Rights Reserved
  • 3. Overview Facts & Figures - As on March 31, 2012 No. of NBFCs Regd with RBI 12385 Asset Base Rs. 1244 billion Public Deposits Rs. 58 billion Gross NPAs to Credit Exposure 2% Classification Liabilities Based - Deposit taking NBFC - D (Category-A) - Non- Deposit taking NBFC - ND (Category-B) - Subsidiary Company NBFC - ND (Category-C) Activity Based - Asset Financing NBFC - AFC - Loans NBFC – LC - Investments NBFC - IC - Infrastructure Financing NBFC - IFC - Micro Financing NBFC - MFI - Factoring NBFC – FACTORS - Infrastructure Debt Fund IDF – NBFC - Core Investment CIC Size Based – Assets >=100 Crores NBFC - ND - SI(Systemically Imp.)© 2014 Srei BNP Paribas – All Rights Reserved 3
  • 4. Role of NBFCs  Prevent concentration of credit risk in banks only and complementing the services of banks  Financial Inclusion – providing finance to unorganized and under- banked segment of the society  Product innovation gives NBFCs a competitive edge - used vehicles financing - small ticket personal loans - three wheeler financing - IPO financing - finance for tyres & fuel  Robust asset quality is a major strength of NBFCs © 2014 Srei BNP Paribas – All Rights Reserved 4
  • 5. Some Facts on Commercial Vehicle Financing  More Than 95% of commercial vehicle sold are finance driven  NBFCs have been the Pioneers as some of them have been in this business for more than 70 years  This is the bread & butter product for the small and medium asset financing NBFCs spread across the country  Traditional mode was Hire Purchase but switched over to Loans against hypothecation since April 2001  Considered as “Low Risk” by rating agencies © 2014 Srei BNP Paribas – All Rights Reserved 5
  • 6. Issues Facing NBFCs © 2014 Srei BNP Paribas – All Rights Reserved
  • 7. Overview  Lack of level playing field with Banks & FIs  Regulator could also play a “developer’s” role  Dependence on banks for resources  Competition with banks on originating assets  Limited options for capital infusion as compared to banks  Some State Govts treating NBFCs as Money Lenders under the Money Lenders’ Act  RBI has withdrawn the priority sector status to bank lending to NBFCs for on-lending to the priority sector which includes SRTOs © 2014 Srei BNP Paribas – All Rights Reserved 7
  • 8. Fund Raising  Bank Funding - Need for liberal Bank Funding at competitive rates - “Wholesaler - Retailer” relationship between banks and NBFCs needed  Urgent need for refinance window for NBFCs on the lines of NHB funding to HFCs  Withdrawal of priority sector status has negatively impacted the quantum and cost of bank borrowing  Securitization guidelines issued by RBI have restricted bilateral assignments  RBI discourages public deposits by NBFCs  Private placement of Secure NCDs also blocked  ECBs by NBFCs allowed only for leasing of imported equipment in the infrastructure sector - not available for CV financing © 2014 Srei BNP Paribas – All Rights Reserved 8
  • 9. Imprudent Taxation of NBFCs  Income Tax Act - Deduction allowed to banks, FIs & HFCs, for non-recognition of income on NPAs and provisions made against NPAs (u/s 36(i)(vii) of Income Tax Act) – denied to NBFCs only  Income on NPAs is accounted on receipt basis u/s 43D of Income Tax Act by Banks and FIs - denied to NBFCs only  Exemption from TDS requirements denied to NBFCs only  TDS on lease rentals entails deduction of TDS from the principal component also  Service Tax on 10% of the Interest component of financial lease & hire purchase transactions make them unviable as compared to a loan transaction  Multiple taxation of financial lease & hire purchase transactions – VAT, Service Tax, Interest Tax & TDS © 2014 Srei BNP Paribas – All Rights Reserved 9
  • 10. Recovery  There is no laid out Recovery mechanism to facilitate recoveries by NBFCs  Debt Recovery Tribunals (DRTs) are not available to NBFCs  NBFCs are not covered under SARFAESI Act  Repossession on default - Need to regulate and not prohibit - Negative Media publicity have given it a criminal colour - Right to Repossess has always been upheld by the courts - Who should repossess and How to repossess are the key issues - FIDC Handbook on Repossession – Dos and Donts of Repossession © 2014 Srei BNP Paribas – All Rights Reserved 10
  • 11.  Filing civil suits : takes ages and thus defeats the purpose  Referring the matter for arbitration : the borrowers/ hirers do not participate  Filing criminal complaints against the borrower/hirer u/s.138 of The Negotiable Instruments Act for Cheque Bouncing - huge back log of pending cases all over the country - special courts setup for the purpose are simply few drops in the ocean - recent Supreme Court order has created unnecessary confusion relating to the jurisdiction - some courts have even commented that they cannot act as collection agents for Banks/ NBFCs Recovery : Avenues & Issues © 2014 Srei BNP Paribas – All Rights Reserved 11
  • 12. Miscellaneous Issues  Financing of Two wheelers and Cars not included under asset finance  The new Fair Practices Code requires communication and agreement in vernacular language/language understood by the borrower  NBFCs denied benefits under Credit Guarantee Scheme (CGTMSE)  Operating lease not treated as financial activity by RBI © 2014 Srei BNP Paribas – All Rights Reserved 12
  • 13. Issues Pertaining to The Motor Vehicles Act, 1988 © 2014 Srei BNP Paribas – All Rights Reserved
  • 14. Overview  The tremendous growth shown by the transport sector has been possible due to ready finance provided by NBFCs and more recently by banks  The prime security in all finance agreements is the vehicle financed  Proper and speedy procedures are must for vehicle financing pertaining to:  lien in the R.C. in favor of the financier  sufficient safe guard to prevent fraudulent deletion of the lien  transfer of the R.C. in the name of the financier in case of repossessed vehicles  Financier’s liability to pay road tax arrears in case of transfer of repossessed vehicles in their name © 2014 Srei BNP Paribas – All Rights Reserved 14
  • 15. Amendments Required in Section 51  Section 51(2) – Change in registered owner in case of amalgamation of Companies Issues  There is no provision for change in registered owner in case of registered owner being companies and amalgamation of such company Suggestions  The registered owner in the R.C. should be changed to new company based on a letter from the transferee company alongwith a suitable proof  Such change should be made without disturbing the hypothecation endorsement in favour of the financier  Financier’s NOC to be mandatory for making such changes © 2014 Srei BNP Paribas – All Rights Reserved 15
  • 16.  Section 51(3) – Safeguards to prevent fraudulent cancellation of H.P./ Lease/ Hypothecation endorsement Issues  this provision has been misused by the borrower (registered owner)  fraudulent cancellation of H.P./ Lease/ Hypothecation endorsement is done based on submission of the prescribed form with forged signatures of the financier Suggestions  on receipt of the prescribed form for such cancellation the registering authority(RTA) shall seek confirmation from the financier within 7 days  the financier shall confirm in writing within 7 days from the receipt of notice from the RTA  Failing which it shall be construed that the financier have No Objection for cancellation of above said endorsement Amendments Required in Section 51 © 2014 Srei BNP Paribas – All Rights Reserved 16
  • 17.  Section 51(5) – Issue of Fresh R.C. in the name of the Financier in case of Repossessed Vehicles Issues  RTAs, taking advantage of the word “may” and refuse to issue fresh R.C. due to: • insisting on financiers to pay Road Tax/ Permit Fee arrears payable by the registered owner • asking financiers to pay the tax (arrears) applicable to corporates even when the registered owner is an individual • insisting on financiers to surrender the permit inspite of the fact that registered owner is the permit holder • There is no provision in the Act for issuance of R.C. in the financiers’ name in case of repossessed vehicles which are unregistered Amendments Required in Section 51 © 2014 Srei BNP Paribas – All Rights Reserved 17
  • 18.  Section 51(5) – Issue of Fresh R.C. in the name of the Financier in case of Repossessed Vehicles (Contd..) Issues  Frustrating delays in issuance of fresh R.C. in the name of financier due to: • no time limit prescribed for such issuance • RTAs send several notices to the defaulting registered owner despite the provision of only one such notice • The registered owner (defaulter) files his objection raising some disputes with the financiers which are outside the scope of The Motor Vehicles Act • the registered owner (defaulter) files objections saying the matter is sub- judice in a court of law • even when the financier submits original R.C. alongwith the application the RTA follows the usual process Amendments Required in Section 51 © 2014 Srei BNP Paribas – All Rights Reserved 18
  • 19.  Section 51(5) – Issue of Fresh R.C. in the name of the Financier in case of Repossessed Vehicles (Contd..) Suggestions • the word “may” should be replaced with the word “shall” in section 51(5) • a clear provision exempting the financier from the liability to pay the Road Tax arrears and the permit fee (the same should be recovered from the defaulting registered owner) • a clear provision exempting the financier from submission of the permit • a new provision for registration of unregistered repossessed vehicles directly in the name of financier • Only one notice to be sent to the defaulting registered owner by registered post with acknowledgment due at his address entered in the R.C. • a maximum period of 30 days should be prescribed for issuance of fresh R.C. Amendments Required in Section 51 © 2014 Srei BNP Paribas – All Rights Reserved 19
  • 20.  Section 51(5) – Issue of Fresh R.C. in the name of the Financier in case of Repossessed Vehicles (Contd..) Suggestions (Contd..) • the RTA should only verify on the default committed by the borrower as per the finance agreement • the onus of proving otherwise lies with the borrower (registered owner) • all other objections raised by the borrower pertaining to the dispute with the financier should not be entertained as RTA is not the proper forum for such disputes • Unless there is a specific court order against the financier or the RTA for transferring vehicles, such objections should not be entertained • In case the financier submits the original R.C., the RTA should issue fresh R.C. in its name under intimation to the borrower without going through the usual process Amendments Required in Section 51 © 2014 Srei BNP Paribas – All Rights Reserved 20
  • 21. 21© 2014 Srei BNP Paribas – All Rights Reserved CMV Rules – Form 23A (Smart Card)  Hypothecation details in the Machine Readable Zone only & not printed in the Visual Inspection Zone  Leads to fraudulent and illegal resale of hypothecated vehicles  Goes against the spirit of The MV Act – safeguard the financiers’ interest  Increases the workload of the RAT staff
  • 22. The Road Ahead © 2014 Srei BNP Paribas – All Rights Reserved
  • 23. Future Scenario  CRISIL predicts NBFCs may overtake banks in retail lending within 2 years  RBI intends to plug the Regulatory Arbitrage between Banks & NBFCs  Direct Tax Code (DTC) shall bring the much desired tax parity with Banks  GST should do away with multiple taxation of Leasing and Hire Purchase  Indian Financial Code (IFC) by Financial Sector Legislative Reforms Commission (FSLRC) proposes to shift from “entity” based regulation to “activity” based regulation © 2014 Srei BNP Paribas – All Rights Reserved 23
  • 24.  A clear provision stating the financier’s Right to Repossess vehicles in case of default subject to terms and conditions/ guidelines prescribed by Reserve Bank of India  “Time is Money” and as such time limits should be prescribed for RTAs  A system of one time Road Tax (life time tax) should be introduced for all class of vehicles. This shall: - Address the problem of backlog of Road Tax arrears due to which many cases are pending before various courts all over the country - Enable the govt. to save large quantum of time and resources in collection of Road Tax - Not hurt the customer since a vast majority of vehicles purchased are financed General Suggestions – MV Act, 1988 © 2014 Srei BNP Paribas – All Rights Reserved 24
  • 25.  Road transport finance and infrastructure finance to be given a special status similar to housing finance  Leasing as a tool for lending to low capital SMEs needs to be promoted  Clarity on definition and taxation on leasing  Supportive laws governing accounting rules, property rights and contract enforcement will be of prime importance  Fast track recovery mechanism like Repossession of Assets using “private” means within the legal framework  A new regulatory approach - NBFCs are a vital link in Financial Inclusion - development of NBFCs to ensure co-existence with Banks & Fis - removing inequitable restrictions vis-à-vis banks - long term policy enabling the players to evolve long term strategies - closer consultation with representative bodies - play the dual role of growth enabler and the regulator Need for Supportive Environment © 2014 Srei BNP Paribas – All Rights Reserved 25
  • 26. Thank You © 2014 Srei BNP Paribas – All Rights Reserved