Vehicle finance - IBANK

Present Scenario of Commercial VehicleFinancing in India & Road Ahead

Presented by :

RAMAN AGGARWALSenior Vice President &Head – Corporate Affairs

Email: [email protected]

© 2014 Srei BNP Paribas – All Rights Reserved

mailto:[email protected]

NBFCs' Perspective


Overview

Facts & Figures - As on March 31, 2012No. of NBFCs Regd with RBI 12385Asset Base Rs. 1244 billionPublic Deposits Rs. 58 billion Gross NPAs to Credit Exposure 2%

ClassificationLiabilities 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RBI has withdrawn the priority sector status to bank lending to NBFCs for on-lending to the priority sector which includes SRTOs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© 2014 Srei BNP Paribas – All Rights Reserved 10

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



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 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


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