Kick starting auto lending

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: The current slump in all segments of the automobile sector, as also the closure of several auto ancillaries in the SME segment, has resulted in a pall of gloom descending on this industry. The slump in this sector, ironically, comes at a time when global fuel prices are at record lows and one would expect buyers to queue up in hordes, especially with the government recently announcing a reduction in Cenvat and a cut in the prices of petrol and diesel, modest though it is and an accelerated depreciation of 50% on commercial vehicles to be purchased from January 1 to March 31, 2009. But despite these measures, the pessimism appears to continue and the current nation-wide strike by truckers indicates that industry is not exactly gung-ho yet.

With export orders slowing down, large companies like Tata Motors and Ashok Leyland are already on partial closure and this, in turn, is causing thousands of ancillary units in the SME sector to shut shop. How then, do we revive this sector, which has been the forerunner of industrial growth for the past few years?

Very clearly, the revival of internal demand is the answer. To start with, state governments need to place bulk orders on bus manufacturers like Ashok Leyland and Tata Motors for modernising and expanding the fleet of state-owned transport companies.

With the corporate sector already tightening its belt and the loss of jobs curbing consumption expenditure, public transport will see a surge in demand, if the various state transport corporations and city bus services can get their act together. You only have to walk the streets of Delhi, Bangalore, Kolkata or Chennai and what do you see? Jam-packed, ramshackle buses belching smoke, with passengers even clinging on at the back. There is obviously a great demand for more buses and with pay packets and consequently demand for quality services on the rise, modern fuel-efficient fleets should be the order of the day. Strict implementation of the Supreme Court directives on phasing out old vehicles, with clear instructions to all state governments to expand and modernise their fleet should, therefore, be the first step towards reviving the bus industry.

If every state road transport corporation can almost replace it's fleet, one can just imagine the rejuvenating effect it will have on the heavy vehicle industry. The defence services can similarly modernise and increase its fleet of trucks.

If the government leads the way, a logical follow through could be to strictly apply anti-pollution laws on the hundreds of lorry/truck operators throughout the country and remove from our roads, the decrepit vehicles, which clearly belong to another era if not the museum.

But wait a minute - where is all this cash going to come from? Given the poor financials of state transport corporations, as also the high incidence of NPAs in financing of private fleet operators, banks may be reluctant to finance either category. This can be overcome by legally binding both categories of borrowers to exclusive banking relationships either with a single bank or with a consortium of banks with compulsory escrowing of their cash flows. This would ensure 100% recovery for the lenders. To make it attractive to the borrowing parties, the manufacturers will need to give attractive freebies like discounts for bulk orders, knocking off dealer commissions through direct sales, discounts on spares and so on.

Banks, on their part, need to make the interest rates attractive and the EMIs can also be stretched more than normally done, because of the availability of escrow. The recent directive to banks to make credit available to NBFC's will, in turn, help finance purchases by private players, especially, individual operators.

Let's move on to the passenger car segment. Here again, the loss of jobs in the private sector, the high interest rates and the postponement of buying decisions, especially for luxuries and non-essentials, have caused a slump in this segment. Looking at the commercial side of this segment, the recent phasing out of 7,000 taxies in Mumbai does not seem to have spelt opportunity to lenders. The real problem in financing individual taxi-owners is the high incidence of NPAs and inability of lenders to either seize the vehicles or even trace the owners.

The Taximen's Union, which has been making a lot of noise about the loss of livelihood for the owners of the vehicles being phased out, needs to be pro-active by offering assistance to lenders for completion of KYC norms (Know Your Customer), arranging group guarantors or even undertaking responsibility for repayment of the loans.

A smart card to all taxi drivers, which incorporates full particulars of vehicles, their owners and/or drivers and which also acts as a licence, identity card and a debit card, can be thought of, which, will also ultimately pave the way for cashless transactions in fuel sales. A similar approach for financing taxis in all other metros (we still see the fuel-guzzling Ambassadors in New Delhi, Kolkata and Chennai) can spur up the demand in the commercial passenger car segment. Kolkata, for example, is currently witnessing a virulent strike by auto-rickshaw drivers, as here too, the offending, polluting vehicles have been banned; but no bank or NBFC seems to be willing to finance these owners for cars instead, or for that matter even, new auto-rickshaws. There is a great opportunity here if lenders, vehicle manufacturers and potential owners, put their heads together to work out a viable scheme acceptable to all parties.

In the personal segment for passenger cars, the slump appears more in the entry level and mid-segment than the luxury segment. Here, the approach will necessarily have to be innovative. One recollects seeing a few ads recently, where builders were offering a car free for booking a flat - a rather innovative tie-up for kick starting demand in both real estate and passenger cars. While high interest rates and scarce liquidity are keeping away buyers, the fear of high NPAs in depressed economic conditions is making bankers shy of lending to this segment. A win-win for both categories could be in the form of a tie-up with employers to finance employees. 'Passenger car manufacturers can have tie-ups with large employers like the government, banks, railways, etc, or private sector giants like TCS or Infosys, whereby cars can be purchased by employees sans dealer commission and on attractive terms, both price-wise and interest rate-wise, and a check-off facility provided to the lending bank, whereby the employer undertakes to remit the EMI to the banks through salary deduction, and also agrees to inform the bank in case an employee chooses to quit his job.

This would secure the interests of both borrowers and bankers and greatly reduce loan delinquency, if not eliminate it altogether. With the Nano likely to enter the passenger car market soon, such an arrangement, which provides credit enhancement to lenders and attractive discounts to buyers, can substantially boost demand.

In the ultimate analysis, let us not forget that we are experiencing depressed economic conditions and while the liquidity situation, at least in India, is not alarming, bankers have become extremely sensitive to NPAs and will loosen the purse strings only if adequate credit enhancement measures are available. At the same time, buyers have turned cost-conscious and the old adage - 'a penny saved is a penny earned' has never been more true, than in these adverse times.

Policy makers, vehicle manufacturers and bankers, therefore, need to work together and come up with innovative ideas, to literally put the customer back in the 'drivers seat'.