The business of financing pre-owned trucks has given stellar returns and attracted investments from both private equity and Development Finance Institutions (DFIs)1. It still has immense potential in a large and growing, but highly unbanked economy like India. The higher risk in providing capital to the unbanked single truck owner, who does not have access to credit from institutions is compensated by the higher interest spreads due to ability to raise capital cheaply from DFI, securitization of portfolios and the satisfaction of doing social good by lending at rates lower than that provided by private/individual financiers.
This capital intensive business grows linearly and has much lower risks than venture like businesses. However, scale will decide the viability and attractiveness of the business to investors and entrepreneurs. The total CV financing market in India is USD 30bn/year2 and a billion dollar loan book in 5 years in not over ambitious as many of new players are already nearing that mark. The challenges for entrepreneurs are – suspension of new NBFC license by RBI to until Apr 2015, riskiness of the borrower – individuals with lower social security resulting in higher default rate and additional tax introduced in the union budget FY13-14 on securitization deals resulting in lower returns for banks who are the main buyers of asset backed securities. Private financiers in the same space and NBFCs lending in the consumer space but not to transport sector will have a head start if they venture out.
- Regional players like Au financiers and Equitas have raised many rounds of funding from private equity and DFIs like CDC, UK.
- Shriram Transport Finance Corp Investor presentation June 2013