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

2014 Srei BNP Paribas All Rights Reserved

Overview
Facts & Figures - As on March 31, 2012
No. of NBFCs Regd with RBI
Asset Base
Public Deposits
Gross NPAs to Credit Exposure

12385
Rs. 1244 billion
Rs.
58 billion
2%

Classification
Liabilities Based - Deposit taking
- Non- Deposit taking
- Subsidiary Company

NBFC - D (Category-A)
NBFC - ND (Category-B)
NBFC - ND (Category-C)

Activity Based - Asset Financing

- Loans
- Investments
- Infrastructure Financing
- Micro Financing
- Factoring
- Infrastructure Debt Fund
- Core Investment
Size Based Assets >=100 Crores

2014 Srei BNP Paribas All Rights Reserved

NBFC - AFC
NBFC LC
NBFC - IC
NBFC - IFC
NBFC - MFI
NBFC FACTORS
IDF NBFC
CIC
NBFC - ND - SI(Systemically Imp.)

Role of NBFCs
Prevent concentration of credit risk in banks only and
complementing the services of banks
Financial Inclusion providing finance to unorganized and underbanked 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

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

Issues Facing NBFCs

2014 Srei BNP Paribas All Rights Reserved

Overview
Lack of level playing field with Banks & FIs
Regulator could also play a developers 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RBI has withdrawn the priority sector status to bank lending to NBFCs for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

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

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

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

Recovery : Avenues & Issues

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

2014 Srei BNP Paribas All Rights Reserved

11

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

Issues Pertaining to
The Motor Vehicles Act, 1988

2014 Srei BNP Paribas All Rights Reserved

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
Financiers liability to pay road tax arrears in case of transfer of repossessed
vehicles in their name

2014 Srei BNP Paribas All Rights Reserved

14

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
Financiers NOC to be mandatory for making such changes

2014 Srei BNP Paribas All Rights Reserved

15

Amendments Required in Section 51

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
2014 Srei BNP Paribas All Rights Reserved

16

Amendments Required in Section 51

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
2014 Srei BNP Paribas All Rights Reserved

17

Amendments Required in Section 51

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 subjudice in a court of law
even when the financier submits original R.C. alongwith the application
the RTA follows the usual process

2014 Srei BNP Paribas All Rights Reserved

18

Amendments Required in Section 51

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.
2014 Srei BNP Paribas All Rights Reserved

19

Amendments Required in Section 51

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
2014 Srei BNP Paribas All Rights Reserved

20

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

2014 Srei BNP Paribas All Rights Reserved

21

The Road Ahead

2014 Srei BNP Paribas All Rights Reserved

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

General Suggestions MV Act, 1988

A clear provision stating the financiers 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

2014 Srei BNP Paribas All Rights Reserved

24

Need for Supportive Environment

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--vis banks
- long term policy enabling the players to evolve long term strategies
- closer consultation with representative bodies
play
the dual
of growth enabler and the regulator
2014 Srei
BNP Paribas
All Rightsrole
Reserved

25

Thank You

2014 Srei BNP Paribas All Rights Reserved