The Hindu Business Line : Used truck financing: Untapped potential

BANKS and finance companies are flush with funds; traditional lending opportunities are still not big. But look around, you will find absorbing markets.

Here is one: the market for used vehicles. There is an opportunity to lend Rs 20,000 crore to those who want to buy second-hand trucks that are over 10 years old.

Today, there are about 24 lakh big and small trucks on the Indian roads. Of these, 10 lakh vehicles, or 42 per cent, are more than 10 years old. Also, 77 per cent of the trucks are owned by transport operators who own fewer than five trucks. Some trucks (sand lorries) are even over 20 years old. An estimate of the average age of trucks in India puts it at 10.89 years.

A vibrant market for used vehicles can be created, for which two measures are necessary. First, scrapping of old vehicles must be encouraged. For this, vehicle manufacturers must be prepared to give a sizeable discount, where it can be proved that the purchase of a new vehicle is a result of an old vehicle being scrapped elsewhere, down the chain, according to Mr R. Thyagarajan, Chairman of the Chennai-based Shriram group.

The group is into commercial vehicle financing. The Government should also give incentives, because the whole economy benefits when the country's fleet is modernised, he said.

Second, institutional finance must be made available for purchase of newer trucks. Today, those who buy vehicle older than 10 years take loans from the local financier, who charges exorbitant rates of interest. The high interest rate deters many transport operators from scrapping or selling their vehicles; they keep them running for longer time.

Assuming that each old truck purchase calls for a funding of Rs 2 lakh, the potential demand for funding works out to Rs 20,000 crore, said Mr R. Sridhar, Managing Director, Shriram Transport Finance Company. Considering the potential, the Shriram group has set itself a target of Rs 1,000 crore for 2004-05, for funding used vehicle purchases. The group, which has also a line of credit from Citicorp for this purpose, intends to generate loan assets worth Rs 600 crore for its own books, and another Rs 400 crore for Citicorp. Last year, the company gave Rs 579 crore in loans for old truck buys.

Recently, Mr Sridhar told his employees that this line of business is profitable. But this view is not shared by many others in the finance business. Companies such as Sundaram Finance and Cholamandalam Investment do finance used trucks, but only those that are about three to four years old.

Beyond this age, the cost of acquisition of a vehicle and the cost of maintenance are high, said Mr M. Anandan, Managing Director of Cholamandalam.

Ashok Leyland Finance's Executive Director, Mr S.V. Parthasarathy, told Business Line that the company too would not finance trucks beyond six years of age. The company has a modest used-truck portfolio of about Rs 500 crore.

The Shriram group proposes tying up with local financiers for refinancing purchase of trucks that are even older, say, 15 years or more. But the other companies do not think highly of the idea.

"Customer contact is important," said Mr Anandan. Cholamandalam tried this model, but discovered it to be risky. Often the truck owners pay their dues, but the local financier keeps the money for himself. In one case, Cholamandalam refinanced an NBFC, but the employees of the NBFC appropriated the collections against their unpaid salaries!

But the Shriram group believes that the lack of competition is all the more the reason why the business could be profitably run.

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