Chennai: Like many loan defaulters, Periasamy Ramalingam ignored the incessant telephone calls from his financier, Tata Motorfinance. The 52-year-old owner of Bangalore-based Infant Tempo Service has delayed payments on six instalments so far.
But Tata Motorfinance, the financing arm of auto maker Tata Motors Ltd, which is yet to receive Rs8 lakh on Ramalingam’s loans for six trucks, is not rushing to seize the vehicles. Even six months ago, the lender’s agents would have driven off with trucks, had he missed just three payments.
Jittery ride: Seized commercial vehicles parked at a farm in Najafgarh, a New Delhi suburb. Vehicles have piled up in parking lots as many transport firms have voluntarily handed over their vehicles to lenders. Mint
“The banks have become a bit lenient,” Ramalingam, who transports goods for Finnish cellphone maker Nokia Oyj’s Indian unit and tyre manufacturer MRF Ltd out of their Chennai factories, said over the phone.
“Their yards are full and they are largely seizing vehicles of only those people who are deliberately avoiding payments,” added Ramalingam. He said he had missed loan instalments because some of his customers had not paid him.
Loan collection agents, who didn’t want to be named, said Ramalingam’s vehicles had not been seized yet. A Tata Motorfinance spokesperson declined to comment.
It’s not compassion that’s holding back financiers, but a spike in the cost of holding confiscated trucks and plummeting resale prices of commercial vehicles in a slowing economy.
“Our tolerance levels have increased as we see no point in seizing the vehicles,” said R. Sridhar, managing director of India’s largest truck financier Sriram Transport Finance Co. Ltd. He confirmed that rising overhead costs of confiscated trucks were rising.
Sridhar, whose company claims a 25% share of India’s pre-owned vehicle loans market, added that the chances of repayment dimmed even more if a vehicle was seized because that would only reduce the earnings of the fleet owner.
In the Rs1 trillion used-trucks market, as estimated by Sridhar, financing has always been limited because of the difficulty in valuing vehicles plying over rickety roads across India. As economic growth slows, that funding has dried up further with banks and finance companies willing to lend only 75% of a vehicle’s price against 100% earlier, some loan agents said.
This has kept prospective buyers away, leaving seized vehicles idle. Vehicles piled up in parking lots through last year as many transport firms voluntarily handed over their vehicles to lenders, claiming they were unable to repay loans because of a drop in business.
In 2004-05, when manufacturing growth was robust, commercial vehicle makers saw a 22% growth in domestic demand, according to the Society of Indian Automobile Manufacturers, or Siam, a vehicle industry group.
The brisk sales were notched up largely because the unorganized trucking business, which is riddled with middlemen, has very low entry barriers, said K.K. Sasidharan, chairman of the Chennai Goods Transport Association. It created overcapacity of trucks amid an acute shortage of drivers, he added.
As industrial activity weakened—in March, factory output shrank 2.3%, the worst in 16 years, according to the Central Statistical Organization— the transporters who expanded rapidly were stuck with excess capacity.
Siam data for 2008-09 showed a sharp 22% decline in commercial vehicle sales to 384,122, the first drop in at least seven years.
The resale value of large used trucks has collapsed in the face of excess supply. For instance, a year-old truck that would normally see a 15% annual depreciation was fetching just half its price, according to Bangalore-based agent Muhataram, who uses only one name, and helps finance companies find buyers for confiscated trucks.
The overcrowded parking lots have also seen frequent thefts of spare parts and rising stockyard rental costs that, according to finance companies, range from a daily Rs50 to Rs100 per vehicle, as it took them longer to resell these vehicles. These circumstances forced them to relax their loan collection and confiscation norms in the past few months.
Sriram Transport Finance’s agents would usually start pressuring customers with calls after a month’s delay in payments with repossession following on the 90th day. But since January, that time has doubled to 180 days and, in some cases, even longer, similar to Tata Motorfinance’s move.
The irony is that the appeal attached with commercial vehicle financing has become its bane. The incentive in lending to truck buyers has been that confiscating a vehicle in the event of a default is easier than seizing other collaterals such as an apartment.
“Companies enter the vehicle financing business because of the comfort that the vehicles are hypothecated and one can repossess the vehicles on non-payment,” said N.R. Narayanan, head of retail assets for ICICI Bank Ltd, India’s second largest lender. “Repossessions need to be carried out in order to keep the system of financing in the right manner, setting the right precedents.”