OVERVIEW OF TRUCK FINANCING AND THE ROLE OF SHRIRAM

Indian economy has been depending more on roads than on rails for its
transportation purposes. Transport finance is considered as priority sector finance
by the Reserve Bank of India.
The road development and road improvement has not kept pace with the growth
in goods are transportation by vehicular traffic. It is expected that the total funds
required by road transport sector for financing of vehicles would be of the order of
Rs.one lac corers of which second hand vehicles would need estimated amount of
Rs.65000 crore.
Among the road transport operators, TATA and Ashok Leyland are the most
popular makes of heavy commercial vehicles category while TATA is the market
leader in the light commercial vehicles category, and expect for a minor percentage
of less than ten, almost all the vehicles either new or the used ones are obtained
through loaned funds.
Being the largest asset financing company STFC Ltd commands 20% to 25%
market share of the used vehicle financing and 7% to 8% of new- truck financing.
This is bound to grow further in view of the fact that the Indian government is
contemplating modernization of highways. This may result in higher demand for
trucks.
The out-look for the business is optimistic and certain policy changes will result
in higher growth rate of road transport industry. With construction of the golden
quadrilateral and North- south West- East corridors, the scope for further expansion
of truck movement is much high, consequently our opportunity for further
expansion of business is very bright.
Shriram company expects to grow at 25% to 30% approximately. STFC Ltd
has already entered the three wheelers and small truck segments and also has
entered funding of multi- axle trucks, passenger commercial vehicles such as jeeps
and vans. Also we have exposure on tractors, agriculture equipment financing &
construction equipment segment. With the expansion in view, we expect Shriram
market share of used vehicles from 20% to 40% another few years.
UNDERSTANDING RC
Unlike consumer durables loans, vehicles are identified with due registration
number and chassis number and a document, which confers ownership and
encumbrance, known as RC-Registration certificate.
Therefore it is quite important to know the significance and legal implications of
a RC document. It is interesting to note that some of the forward looking states like
MP are having electronic RC cards (books), which very much look like credit cards.
These cards when punched give all details of the vehicle including lien on the

vehicle by the financier. The financing professional therefore needs to know the
latest developments pertaining to RC in each State and keep abreast of the same.
RC simply stands for REGISTRATION CERTIFICATE (of vehicle). It normally
contains (it differs from state to state) the name of the owner, the assignee (lender),
engine number, chassis number, full particulars of vehicles like make, capacity
(horse power), nature of vehicle such as passenger, goods carrier, personal, Omni,
truck, tipper etc and above all, the Registration number provided by the state.
However, permits contain other details such a capacity to be carried, area to ply,
tour routes etc.

The importance of RC is that it registers ownership and also the

assignment of ownership to the lender in the case of hypothecation of
vehicle.

The registration number is important and only one vehicle can ply with
the same number.

Please ensure that the engine number and the chassis number are the
correct ones.

The dates of re- registration when either ownership is transferred or

when the state is changed,, need be verified.

A vehicle cannot be assigned before the date of registration.

Insurance must be obtained from the date of registration, without which

plying will be against law.

FITNESS OF VEHICLE
It is important that vehicles financed by Shriram are always fit for road
transportation as certified by RTO, without which income from the vehicle would not
be generated. Periodical checking for current fitness by the Finance company is a
must. FITNESS CERTIFICATE must be current and valid for all the vehicles that are
financed. Therefore Fitness or road - worthiness including emission-test validation if
any periodically kept updated as stipulated in each state. Vehicle therefore
needs to pass fitness as and when required by the authorities in terms of
motor vehicle rules.
LOANS
Loans can be either HP or lease or hypothecation. A table annexing the
difference between HP and lease is appended to this note. Lease has different
types, which are again appended in the form of table. Hypothecation is the
preferred form of lending due to the advantages. Earlier it was HP or hire purchase.
Hypothecation is a position where the owner assigns the right of ownership to
the lender, though still holding the possession. Hire purchase (HP) is something
similar to installment purchase through the intermediary of a lender and the

ownership passes on to the buyer not only after paying all the dues\installment but
also when the lender agrees to sell.
Leasing is renting, with or without an option to transfer ownership at the end of
payment of agreed lease rentals. In all these forms of lending, the lender can
possess vehicle without difficulty, because RC confirms the assignment or actual
ownership of the vehicle according to the contingency.
NON USE OF VEHICLE
VEHICLES ARE PRODUCTIVE assets and when not used result in income loss not
only to the owner, but also to the lender, since the lender is unable to collect the
installments, due to non generation of revenue.
Report must be made in NON USE (NT) form immediately when the branch comes
to notice the non- use of the vehicle. Even insurance companies take cognizance of
non- use, as it is a different risk then when a vehicle is plying. When vehicle is
seized there is non use condition. Immediate ways and means must be found out
either make it run and earn or dispose and liquidate the liability; if not, the loan
dues will bulge due to penal provisions and this could be dangerous when there is
no income generation. Proper inventory and maintenance ensure speedy disposal of
the vehicle.
VALUATION
Since Shriram group has major component of loans of second hand vehicles it is
imperative that valuation intricacies need be understood. Market enquiries and
keeping abreast of latest market intelligence cannot be substituted by theoretical
inputs. Fraudulent practices in trying to inflate values and or conceal defects in
vehicle, which are likely to reduce the value of assets, are prevalent. And here
nothing likes experience and maturity that prevail in eliminating the probable risks
of over valuation.

Even insignificant features like TYRES have effect on value. New ones add
value and worn out ones deprecation the same.
Chassis numbers in the RC would be different than the actual one, which may
cause reduction in the value of vehicle and more importantly disallow claims
of insurance in a contingency.
Reassignment of registration mark is very important. When a vehicle of one
state is sold to a borrower in another state, the reassigned registration
number needs to be properly incorporated in RC lien and also the insurance
company needs to confirm the nothing in the policy.

Experts are quite capable of checking the gearbox and in determining the age
of vehicle. While the staff may not be able to acquire the competency, suffice if they
know that while valuating a second hand vehicle, they need on dependable experts.

TYRES OF COMMERCIAL VEHICLES

As seem in the relevant provisions of motor vehicles act sec10 (2), there are
different types of vehicles. However, even among the commercial vehicles there are
types as mentioned in the case of premium calculation and also like; single axle,
multi axles, ICV and IMV; the values differ depending on technical superiority and in
financing them the professional must be velar about the specification.
PROFIT, REVENUE AND COSTS; NATURE AND CHARACTERISTICES
Profit represents the difference between revenue and costs. Its size, therefore, is
measured by the adequacy of revenues to meet the costs on material, personnel
and taxes, interest charges, deprecation and repayments of the installments of
loans for purchase of vehicles. Yet, profitability studies of the trucking industry have
not been many, mainly because of the non availability of reliable data due to the
industry being mostly comprised of single truck operators, not given to systematic
data generation or records. Further, the operators may not give the correct picture
for fear of increased taxation or to seek greater sympathy.
Costs of operations can be categorizes into fixed costs variable costs and terminal
costs and line charges. Fixed costs mainly comprise salary of crew and of the
administrative staff, infrastructure, interest on capital borrowed, deprecation and
other taxes and insurance. Salary of crew depends on whether the crew comprises
on driver and one cleaner or two drivers and one cleaner, as determined by the
nature and length of trips. Staff and crew salary and other infrastructure costs,
however, are not high in the case of single truck operator. Wages of driver, when he
being the owner, is not normally recorded in the books. Interest charges become
notional if the single truck operator has used own funds. It is also not recorded in
the books of accounts. Only when borrowed funds are employed interest is recorded
as expense. Deprecation becomes important due to its income tax. Fleet owners
and companies incur fixed costs in substantial amounts.
Variable costs depend on the distances covered. The longer the trip- length, the
higher will be the total variable costs. The main components of variable costs are
fuel and lubricants tyres, spare parts and expenses on repairs and maintenance.
Terminal costs include loading and unloading charges. Line charges comprise the
commission paid to agents, broker and other expenses on the way. Line costs also
include other way side incidentals incurred at police, boarder check posts, etc.
REVENUE
Goods transport industry usually operates a two- rate freight schedule; viz. a rate
for parcel service and small goods quoted on a ton/ kilometer basis and a rate for
full- truck loan. The rates for the part loads and parcels are generally higher than
those for full- truck loads. Revenue depends on the nature of goods carried and trip
lengths. It increases as distance increase, but at a diminishing rate. As a result, the

rate per ton/ kilometer tends to diminish and market situation, such as the relative
demand for trucks and their supply from time to time. Fluctuation in freight rates
also occurs due to seasonality e.g. during peak seasons, the rates go up by as much
as 50% and during slack seasons they fall by similar proportion. Though there are
official freight rates notified by state governments, the actual rates prevailing in the
market do not reflect the same. It was seen that transport companies generally
charge higher freight rates than small operators.
INTERNAL RATE OF RETURN
Internal rate of return (IRR) is that discount rate (interest rate in the case of an
advance) when applied and discounted to the future cash flow (payment of
installment in the case of HP) and summed up along with the discounted value of
the terminal value of the project including the working capital, if any (not applicable
in HP), just equates the present total investment ( the advance in HP). In other
words it is an attempt to know at what rate the future cash flows receivable in an
advance would have to discounted and summed up to equate itself to the total
present investment. The formula can be written as below Since by merely looking
at the repayments an cannot arrive at the exact discount rate to equate the both
sides, trial and error methods are used and on approximation is arrived. However,
with the introduction of personal computers, programs are available when the
relevant parameters are fed, IRR is automatically worked out and result is shown in
the screen.

Internal rate of return below a cut off rate (normally the opportunity cost or the cost
of capital/ funds) may not enthuse the company to give an advance. Therefore while
evaluating a loan financially IRR is employed as a technique to not only estimate
the profitability of the proposal by taking into account the time value of money but
also as tool to decide as to whether the future profitability would be higher than cut
off rate or cost of fund. Loan deploys EMI principle for loan recovery.
INTEREST RATE METHODOLGIES
Conceptually the flat Rate interest calculating and fixing of monthly rentals need be
understood, even though, at present such things are readily available in
computerizes programs and systems.
Example: 200000 finance for 20 months at 12% for the entire amount and the entire
period will be 40000. This will be added to the principal amount the monthly
payments including interest will be 12000
However, in the case of diminishing balance interest method, the principal portion
of the repaid amount will be deduced and the agreed interest will be calculates on
the balance amount and not the entire amount. Banks use this method in the case

of Hypothecation loans. In the modern practice the efficacy of collection of

instalments is measured by calculating internal rate of return, which reveals to the
lender as to percentage of interest earned on overall basis.
ASSESSMENT OF VEHICLE VALUE
Assessment of vehicle is done by looking at the most valuable parts; and it is
applicable for used vehicles. In the case of different vehicles, different criticalities
exist. For example, passenger vehicle the permits and route licenses are expensive.
In the case of agricultural vehicles, new vehicles are offered high discounts and
incentives for middlemen, and therefore the value depreciates at the end of first
year. In the case of construction equipments and such vehicles, irrespective of the
condition of the vehicle transmission efficiency is very important in assessment of
the asset. Therefore these time dependent tips need understood from experienced
product heads while embarking on valuation. Grids are guidelines for valuation and
are updated as and when required.
Assessment of vehicle is applicable only in the case of the case of used vehicles.
The following documents are verified to assess the vehicles value: RC (certificate of
registration) book: Verification of the RC book is the first step, while verifying the RC
book; check the following details:

Vehicle model
Type
Year of manufacturing
Chassis number and condition
Current registered owners name in the RC book
Financiers name endorsed in RC or not (if any)
F.C.(Fitness Certification): F.C. is form No 38 as per RTO rules. The
vehicle that is being considered for loan should have its fitness certificate
live. It is also to be verified that F.C. has been done regularly without any
breaks. In case of new vehicles no need for F.C. for the first two years.
Road Tax: Road tax (including green tax and idle tax) while checking the
Road tax, check that taxes are paid regularly or not. If any idle tax is paid, F.E.
should ask the customer for that reason the vehicle was in idle condition. The
Road tax should be up to date.
Insurance: while checking the insurance, check that the policy is current or
not. And also should see the insured declared value (IDV), it should be more
than the funding amount for vehicles less than 12 years of age.
Number of vehicles owned, make, model, free/ hypothecated. Details of
properties owned & outside liabilities.
Verify the RC book in respect of vehicles owned by the borrower and
guarantor and details of properties owned & outside liabilities and record the
fact in the loan application form.

Proof of residential address of borrower& guarantor (verify ration card, visit

their places for verifying assets & liabilities. Assets may be in the form of
vehicles, TV, fridge, site; house etc. liabilities may be in the form of loans
from others and banks.
Bank statement, financial statements, Title deeds of properties, if any.
Assess income generation form the asset that is to be acquired and verify the
possession or mobilization of margin money.
Calculate the income prospects of the borrower with the vehicle that might
be purchased with aspects such as cost of operation and the net surplus
expected, to cover the installment payment, maintenance etc.
Income to be generated from the commercial vehicle after deducting all the
expenditure should be normally double the monthly installments (EMI) to be
fixed. This would enable fairly comfortable living and safe repayment. This
2:1 ratio of surplus income from vehicle to be more than double of the
installment which is known as DSCR. (Debt service coverage ratio).

Do not proceed further if the margin money stipulation as well as income

versus repayment of installment ratio is not adequate/ unsatisfactory.
INTEGRITY: even if the vehicle is best and the income is very good but the
borrower has no intentions of repayment, the loan is risky.

Integrity is the most difficult to assess. The judgment of human integrity is

not easy but subjective too.
Market enquiries, visit to the place of the proposed borrower, background
enquiries, personal interview, behavior study, gut feeling by looking at the
individual etc., are some of the methods to assess the intentions of the
proposed borrower.

Usually persons with experience, like the manager in a branch would be

able to do this kind of an enquiry/ assessment. When in doubt, about the integrity
further proceeding to be completely stopped, instead of regretting later.
REPOSSESSED STFC VEHICLE: STFC Yards when visited by intending buyers give
source of vehicle finance for STFC. In this regard STFC has an arrangement, with
online Auction service providers for displaying of repossessed vehicles available for
auction sale.
VEHICLE SERVICE/ REPAIR WORKSHOPS: Commercial vehicles, tractors, special
vehicles and construction equipments etc. are serviced in workshops and service
centers. They are indeed customer identifying places for used vehicles.
SPARED/TYRES DEALING SHOPS: These dealers can refer customers, if
persuaded.

INSURERS: Since almost all the commercial vehicles (except very rare cases like
some agricultural purpose tractors) need insuring due to RTO registration
requirement, general insurance company/ insurance agents to serve as useful
contacts for identifying prospective customers.
COMMERCIAL VEHICLE OWNER ASSOCIATIONS: Trade related associations like
Transporter association / builders association (for construction equipments/bore
wells/earth moving equipments), agriculturists body, auto drivers union, tourist
operators union etc. are source where data bases are available for sourcing for new
customers.
WALK IN CUSTOMERS: STFC branches invariably display vehicle details of
repossessed vehicles in their notice boards. This is a source of attraction for walk-incustomers. SHRIRAM (STFC) has a BRAND image and has established its leadership
in vehicle financing. Therefore walk in enquiries and customers to account for
identifying new customers after satisfactory credentials.
ROAD TRANSPORT OFFICES: it is mandatory to register with regional transport
office (RTO) all the vehicles therefore new customers could be located, by enquiring
who come there for either new registration or for modification in change in
ownership etc., as to their financial requirements.
NOT TO DEPEND ON BROKERS: STFC has been consistently avoiding dependence
on brokers for identifying customers.
KNOW YOUR CUSTOMERS (KYC NORMS): Once a customer is identified for
initiating a vehicle finance proposal, the customer needs to be fully known as per
the stipulations of KYC norms. If an unknown customer is helped for commercial
vehicle finance it might endanger, as the vehicle could be used for illegal purposes
and terrorist activities or even the money could be diverted for illegal acts against
national or global interest.
In order to subvert this, internationally accepted norms have been drafted to be
adopted for identifying credit worthy borrowers by regulatory authority namely
RESERVE BANK OF INDIA, which are known as, KYC NORMS FOR
IDENTIFICATION OF CUSTOMERS. DOCUMENTS OF KYC NORMS for
CUSTOMERS IDENTITY ARE MANDATORY: The documents mentioned are a
must for identity proof of an individual like ration card, passport, bank passbook,
voters ID etc. such lists as applicable in the case of HUF and companies that borrow
from STFC, are also appended in the same Annexure. They need be adhered to
without fail.
A rightly identified customer is a perpetual to STFC and also benefits himself herself.
A wrong identification causes avoidable problems of follow up, and unpleasantness
in recovery.

ASSESSMENT OF CUSTOMERS
Assessment of customers involves three stages, Establishing customer knowledge
understanding customer requirement and establishing, checking as to whether the
customer would generate his own margin money, would make enough income from
the asset i.e. vehicle to eke out own living and make repayment as per schedule
whether customer has the integrity.
Check as to whether the borrower is a direct customer, or introduced by existing
customer or introduced by a vehicle dealer etc. interact with the customer to
extract the essential details for further discussions.

Find out and understand the customers requirements.

Find out as to whether STFC schemes would match the requirements.
Check whether the customer has documentary proof of ID as well as vehicle
in question.

In case of new customers

Experience in the field (collect information from the right customer is critical
function in loan application form) of both borrower and guarantor.

IDENTIFICATION OF CUSTOMER: Identifying the right customer is critical function

in a business. In financing activity, the success lies in identifying the best credible
and repaying customer.
THE BEST CUSTOMER: The best customer is one who is able buy an asset ( a
commercial vehicle) from STFC and own saving and repay the borrowed amount
with interest and installments from out of the earning made from the brought asset,
namely the commercial vehicle. These are all several methods identifying the best
customers.
EXISTING CUSTOMERS: Customers who are already in business with STFC
introduce their friends or relatives. These references are very useful in identifying
new customers.
ASPIRING DRIVERS/HELPERS/CLEANERS: These middle income aspirants want
to own commercial vehicles instead of working for somebody i.e. wanting to
graduate from employment to entrepreneurship. They have been the mightiest for
newer identification of customers.
DEALERS OF NEW COMMERCIAL VEHICLES: Commercial vehicle manufactures
appoint dealers for selling of new vehicles. Customers who approach these dealers
are persuaded to avail the financial assistance and could be potential customers.

MIDDLEMEN DEALERS (WHO ARRANGE BUYING AND SELLING OF OLD OR

USED COMMERCIAL VEHICLES): By approaching these parties new customers
could be developed.
SPECIAL EVENTS: TRUCK UTSAV type of events conducted throughout the
length and breadth of the country to promote the awareness of services offered by
STFC also brings additional customers.
TRANSPORT HUBS: There are many hubs, like MANDI markets and or transport
hubs, where transport and other commercial vehicular activities spur. It enables
identification of new/ potential customers.
VEHICLE STANDS: Auto, tempo, passenger vehicle and lorry stands, where the
transport vehicles rest. These stands generate new customers.
SETTLED ACCOUNTS: Borrowers of new vehicle and newer vehicles when
promptly settle their dues such vehicles become eligible to be financed under
different heads (segments). These vehicles are good source of generating new
borrowers.