IPO-bound Tata Capital plans to raise share of used vehicle loans. Here's why

Mumbai: As Tata Capital Ltd prepares to go public next month, it plans to reduce its reliance on financing new vehicles and increase the share of advances for used automobiles to mitigate the higher cost of bad loans it inherited from Tata Motors Finance Ltd.

The non-bank financial company has chalked out a plan to improve the quality of the auto financing business and believes it will start showing results in the next two years or so, said a person aware of the discussions who didn't want to be quoted on business plans ahead of the IPO.

“The idea is to increase used vehicle financing to 50% of the book, from 30% at present," said the person cited earlier. “Financing of used vehicles would lead to better margins, lower loan-to-value (LTV) and better loan yields."

The Mumbai bench of the National Company Law Tribunal approved the merger of Tata Motors Finance into Tata Capital in May. Before the merger, Tata Motors Finance provided loans to buy new and pre-owned vehicles and financed transporters and dealers.

As of March, Tata Motors Finance had a loan book of ₹30,227.2 crore and Tata Capital (pre-merger) at ₹1.98 trillion, according to disclosures in the draft prospectus.

However, the consolidated numbers after factoring in the merger show that Tata Capital’s credit cost ratio increased from 0.4% in FY24 to 1.4% in FY25. In absolute terms, it jumped from ₹592 crore to ₹2,827 crore. Credit cost is the sum of provisions and writeoffs expressed as a percentage of assets.

Still, Tata Capital fares better than some of its peers. For instance, Bajaj Finance Ltd’s credit cost ratio was at 2.2% and L&T Finance Ltd’s 2.5% as of FY25, according to Tata Capital’s initial public offer (IPO) filing.

Queries emailed to Tata Capital remained unanswered.

Tata Capital, the non-banking financial company (NBFC) subsidiary of Tata Sons Pvt. Ltd, filed its draft share sale prospectus in August and, according to reports, is expected to list in October. The company is looking to raise $2 billion, while promoter Tata Sons seeks to sell up to 230 million shares, and International Finance Corporation is looking to offload up to 35.8 million shares. The IPO also includes a fresh issue of 210 million shares.

The listing comes as the Reserve Bank of India’s (RBI) deadline for certain large non-bank financiers to go public ends on 30 September. RBI regulations classify NBFCs into four layers based on their size, activity and perceived risks. The upper layer comprises other prominent names like Tata Sons, LIC Housing Finance and Shriram Finance. Those are subject to greater regulatory scrutiny than their smaller peers.

News agency PTI reported on 12 September that Tata Capital is likely to launch its share sale in the first half of October after the RBI granted an extension.

Tata Motors Finance’s merger with Tata Capital was meant to consolidate and “simplify, scale, and synergize" the businesses. However, the quality of Tata Motors Finance's book was not on a par with that of Tata Capital, prompting the need to realign the combined entity's portfolio.

Tata Capital’s gross stage three loans—repayments delayed by over 90 days from the due date—stood at 1.5% of total loans in FY25 without accounting for the merger. If erstwhile Tata Motors Finance numbers are included, then the ratio deteriorates to 1.9%. In comparison, Bajaj Finance’s gross stage three loans were at 1% in FY25, whereas L&T Finance reported a ratio of 3.3%.

“The changes to the loan book composition cannot be done in a hurry but the plan should start showing results in the next 24-30 months," said the person quoted earlier. “Once implemented, the credit cost of that business will start to align with that of Tata Capital."

The person said it is difficult to compete with large private sector banks when it comes to financing new vehicles. These banks can offer much better rates than non-bank financiers. According to the person, such competition would erode margins, something that Tata Capital wants to avoid.

However, Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, expects Tata Capital’s IPO to increase competition across various housing, auto, and small business loans.

“The company's growth rate has been strong and listing will impose more demands to keep sustaining higher growth rates," Ganapathy said in an email to clients on 21 August. “Being the third largest diversified NBFC, this implies greater competition in the space."

However, he cautions that Tata Capital’s listing may have a bearing on the valuations of unlisted NBFCs.

“Of late, listing of some NBFCs has happened at a significant discount to their unlisted market price," Ganapathy said. “If a large NBFC like Tata Capital lists at a significant discount to its unlisted price, it will have implications for valuations of the unlisted NBFC universe."