Auto finance company Shriram Transport Finance Company (STFC) would maintain its Net Interest Margins in the current fiscal by raising more resources at fixed cost, through securitisation of asset pools and by raising fixed deposits, while simultaneously reducing the share of its bank borrowings.

The share of STFC's fixed cost borrowings is currently 75 per cent of total borrowings and this may go up to 80 per cent in the last quarter, said Mr R. Sridhar, Managing Director, STFC.

“Any increase in interest rates will impact only 20 per cent of our borrowings. That we can pass on to our customers as and when then loans mature. Therefore, the NIM will not be under pressure because of borrowing cost,'' he said.

As on December 31, 2010, STFC's NIM was 6.69 per cent.

Of the total resources, 15 per cent is from retail-fixed deposits, 35 per cent is from securitisation, 25 per cent from bank borrowings, 10 per cent from institutions and 15 per cent is the company's own net worth.

The non-banking finance company securitised Rs 1,600 crore of old and new commercial vehicle loans in Q3 FY'11.

“By doing more portfolio sales and by borrowing for longer term we keep our assets liability matched. We borrow long and lend short,” Mr Sridhar said.

Banks invest in these securitised pools of commercial vehicle loans in order to meet their priority sector requirements.

According to Mr Sandeep Singh, Senior Director and Head, Structured Finance, Fitch Ratings, the quality of securitised asset pools rated by Fitch across NBFCs is good.

“These have been doing well in terms of performance and collection. None of the asset pools Fitch has rated, have faced a downgrade – commercial vehicles, construction equipments or tractor loans. In fact, eight tranches of Shriram Transport were upgraded in FY11,” he said.

Another advantage is that these asset pools don't face any interest risk as these loans are fixed.

“In case of commercial vehicle loans the cash flows are fixed both on the asset side (when the NBFCs lend money) and on the liabilities (when the investor invests in the securitised assets). So there is no interest rate risk,” Mr Singh said.

But the increase in fuel prices and inflation without a commensurate increase in freight rates could lead to margin pressure for truck operators, potentially impacting pool performance in 2011. He however maintained that the risks would get mitigated by robust domestic demand and GDP outlook.

Ms Aditi Thapliyal, banks analyst with Espirito Santo Securities said that with Base Rates of most banks seeing a rise, it may become difficult for auto finance companies to securitise asset pools. “Many banks' Base Rates are in the 8.5-9 per cent range and they would not be willing to go below that while investing in securitised asset pools.

“So, it is possible that STFC may wait for the interest rate scenario to stabilise. But having said that, the fourth quarter is likely to be a strong one because that's when most banks' would look to meet their year end priority sector requirements,” she said.

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