Vehicle finance - IBANK

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

NBFCs' Perspective

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

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

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

Issues Facing NBFCs

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 RBI has withdrawn the priority sector status to bank lending to NBFCs for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

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

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

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

 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

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

Issues Pertaining to
The Motor Vehicles Act, 1988

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

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

 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

 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

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

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.

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

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

The Road Ahead

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

 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

 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

Thank You

Vehicle finance - IBANK

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