The key trigger was the robust rise in income and profits in the last few quarters, more so in the three months to March. Strong macroeconomic factors and robust demand pick-up in automobiles led to better financing opportunities for these companies, some of which had even curtailed retail lending during the slowdown.

Bajaj Auto Finance registered a 42% jump year-on-year (y-o-y) in net interest income at Rs198.2 crore, as its deployment doubled to Rs1,326 crore.

Likewise, STFCL, a leader in commercial vehicle financing, posted a 44% y-o-y growth in net interest income at Rs650 crore, with a 40% rise in disbursements at Rs3,900 crore.

Profits soared, too. Bajaj Auto Finance’s net profit jumped 67% y-o-y to Rs25.2 crore, and that of STFCL jumped 72% to Rs260 crore.

Greater flexibility and customization of loans helped the non-banking finance companies (NBFCs) cash in on the resurgent demand for auto financing, be it for tractors and utility vehicles by Mahindra and Mahindra Financial Services, commercial vehicles by STFCL or two-wheelers by Bajaj Auto Finance.

These companies, when compared with banks, score in terms of loan recovery due to personalized relationships with customers, credit assessment skills and operational efficiency. Cost-to-income ratio is far lower at around 28-30 compared with banks, where the average is around 50.

However, there is increasing competition from banks expanding their retail loan portfolio. Says an analyst with a Mumbai-based broking firm: “Until six months back, most banks had stopped lending in the auto segment—now they are back.” Banks’ cost of funds is lower—5-6% compared with 9-11% for NBFCs. This puts pressure on profit margin, which will reduce with competition.

As of March, large auto finance firms also reported strong capital adequacy ratios—Mahindra and Mahindra Financial Services and STFCL at around 18% and Bajaj Auto Finance at 26%—at the end of the fourth quarter of fiscal 2010, compared with prudential norms at 12%.

Access for low-cost funds will remain a challenge for these companies when interest rates firm up. But large firms in the segment have benefits of a strong parentage, which could help them secure stable credit ratings.

What paid off well for the auto finance companies is the quick diversification and inroads into semi-urban and rural markets where private sector banks are not very active.

Mahindra and Mahindra Financial Services, for example, has diversified from being largely a tractor-finance firm to financing cars and utility vehicles. STFCL’s initiatives in facilitating trade of used trucks brings in fee-based income. Bajaj Auto Finance services the consumer durables sector, besides its core two- and three-wheeler loans.

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