Consumer Issues
Speed money: The murky world of commercial vehicle finance

What is, actually, a commercial vehicle, and why is this business of getting a loan to own one so difficult?

Most articles on motoring in India can be and are researched off the Internet to some extent or the other. On the other hand, there seems to be an amazing dearth of information on the subject of commercial vehicles in India, anywhere. Barring some dry statistics on manufacturing, some raw data on the vehicles themselves, and little bits and pieces here and there, it is almost as though the highly visible yellow licence plate industry does not even exist for much of the motoring and general media in India.

As though this was not bad enough, the cloak of silence and secrecy becomes even darker when the subject of financing for commercial vehicles is brought up, despite all efforts. Yes, there are arrangements for very specific categories like ex-armed forces personnel, sometimes there are "special" drives to help people from specific communities, but beyond that, for the average commercial vehicle driver who wants to become an owner, the road is lonely, bleak and full of obstacles. Put it this way-if you are not a "somebody", then getting a loan to buy a commercial vehicle will be at terms that will put ancient moneylenders to shame. Does 8%-10% per week shock you?
This is very difficult for most of us from the educated middle class to even begin to understand. The "average" commercial vehicle operator in India is expected to be a Master of every law pertaining to operating commercial vehicles on the road-local, district, state and national-as well as respond to and respect every agency out on the road ostensibly implementing them. Taxation, excise, octroi and other fiduciary aspects as well as frequent changes and often conflicting interpretations are supposed to be adhered to, ignorance of these can drop him into custody faster than a radiator boiling over when stranded at check-posts.

And what is his usual eventual dream? That one day, with hard work and luck, he will eventually be the owner and master of his own commercial vehicle.
So, first of all, what is, actually, a commercial vehicle, and why is this business of getting a loan to own one so difficult?
Let us, as always, start from the bottom up.
Starting from the motorcycle-taxis so popular in Goa and some other parts of India, moving on to three-wheeler autos, taxies, multi-purpose people-carriers (often operating also as quasi-public transport), pick-up trucks and upwards to huge gigantic articulated trailer trucks-and all points in between. Think about those interesting classic cars in Junagadh? The ancient Land Rovers thudding their way past off Darjeeling? The combo motorcycle front rickshaw rear "vans" in West Bengal? The round coracles with old scooter engines in Tamil Nadu? The combine harvesters from Punjab, the drill rigs from Andhra, and many more. By law supposed to be displaying yellow plates to signify the difference, but in some cases, for very specific purposes, they can also be white or black-and sometimes, as with the many 'jugaad' (homemade) vehicles all over the country, they need not have any registration plates.
Next, how does the man on the street, the actual driver-operator, get to eventually own one of these for himself? Like the rest of the middle class who have jumped straight into the easy finance for personal vehicles bandwagon, why can't they also get an easy loan and move ahead in life?
To start with, one has to understand the basics of the commercial vehicle industry in India. Briefly-about 15 years ago, this correspondent had the opportunity to conduct a survey and provide recommendations based on driver responses for a leading commercial vehicle manufacturer, and in this context travelled all over the country interviewing drivers and cleaners operating all sorts of commercial vehicles. The findings were then duly presented to the said manufacturers, who, in turn, provided a copy of their own internal research done on the basis of similar surveys of large fleet and institutional customers. The results could not have been wider apart.
The drivers and men on the road perceived even then the growth of the smaller commercial vehicle-witness the runaway success of the Tata Ace and its derivatives. The owners on the other hand wanted bigger capacity on single rear axles. The drivers demanded better in-cabin comforts like air-conditioning and sleeper berths, the owners were of the opinion that even a stereo or a comfortable driver's seat was a costly distraction. Maybe these still hold good today-but the big difference is that there is large category of single vehicle owner/operators on the road now, whether operating as part of a larger fleet, or whether as a stand-alone privateer-and his demands as well as needs for finance as well as vehicle specs are way different from that of the institutional or fleet customer.
At the same time, manufacturers respond to market trends and needs, which used to be driven largely by bigger and institutional customers like State Transport undertakings, defence and fleet owner/operators. Now they, the manufacturers, need to and are reacting to demands made by individual customers. Air-conditioners and comfortable sleeper berths in trucks and buses are no longer rarities. But, at the same time, the traditional banks and financiers are wary of dealing with stand-alone independent buyers.
So what's the present day solution?
Tweaked for local conditions nationally, broadly it is like this-dealers have their own network of local financiers who step in to fill the huge gap for loans and leasing needs, with eventual interest rates that are way above anything logical. These local financiers also provide, at a cost, coverage for all the other woes that can befall a client. None of this comes free, of course, and so what we have is an industry that feeds on itself-makes life difficult for the small entrepreneur, and in return, increases his cost of doing business.
So, net result, has the great automobile revolution in India by-passed the commercial vehicle segment, especially when it comes to financing for stand-alone customers?



Rakesh Agarwal

7 years ago

Knowledge of the author shows through. Financing of commercial vehicles is an intricate business which an individual operator can neither understand nor will he be in a position to negotiate. Refinancing is even more complex when one does not know what one owes in the middle of the replayment schedule, and is happy getting money when he actually owes it. The cost of financing in such cases of refinancing can be as high as 100%.

Rakesh Agarwal

7 years ago

I wrote detailed comments but when I pressed the "submit" comment, it said the "security code dot not match" and wiped out all my comments. :-(


V Malik

In Reply to Rakesh Agarwal 7 years ago

Please save before posting next time, sorry about that, web-admin to please note - comments which do not get posted can be re-directed back to the person making the post?

Saurabh Maheshwari

7 years ago

The author seems to be totally ignorant about the dynamics of the industry. There are players like Reliance Consumer Finance, Sundaram Finance, Shriram Transpport Finannce, HDFC Bank, ICICI Bank, Citibank, Cholamandalam Financeand numerous other financiers who are active in this space. In Fact, statistics say that 98% of the vehicles sold are financed.

The growth in the numbers of Commercial Vehicles sold has a direct correlation to the number of vehicles sold which has grown exponentialy.

For a driver, all he needs is a 20-25% margin money and a guarantor who owns a commercial vehicle and he will get financing for the balance amount. In a lot of cases, even the requirement of the guarantor is waived off if he owns his own house.

Please get your facts right before putting them here.


V Malik

In Reply to Saurabh Maheshwari 7 years ago

Dear Saurabh Maheshwari,

I have researched extensively the financing of small and light commercial vehicles in and around Delhi, and have general knowledge of the rest of the country. CitiBank is to the best of my knowledge not in the CV space anymore, and the rest are happier dealing with the two top-heavy segments - the large transporters as well as the corporate buyers.

Yes, a large number of CVs are financed for single owner/operators, but often to and via intermediaries, and then they go down the chain to be refinanced to the vast majority aspirational single vehicle operators, adding multiple layers at every step. Just a cursory look at how 3-wheelers are financed and then re-financed in and around Delhi will give you an idea.

Please go with any CV driver from wherever your neighbourhood is, and (a) understand the dynamics of arranging the margin money and then (b) try to get a loan - and also please try to get deeper into what "owns a house of his own" can mean to different people.

It gets even worse and the transactional costs shoot up even more when the aspirational single CV owner/operator tries to enter through the 2nd hand/resale market route.

Two more parts of this series are due soon.

Thank you for your kind feedback.

Veeresh Malik


In Reply to V Malik 7 years ago

It really true that getting a CV loan for a Retail customer or First time Users(FTU) is not as easy as getting a Car or Home loan..

The main reasons are
1. Less competition among the financiers, Public sector banks (PSB) are still not into this business in a big level
2. Existing Big Banks & NBFC's are getting enough business from the Strategic customers and not touching the Retail or FTU's
3. The Risk of Higher delinquency in the Retail or FTU
4. The small NBFC's and Private financiers are making use of this opportunity and charge as high as 30% from Retail & FTU clients ( Imagine a First time SCV buyer paying 30% interest on the asset, what will be the ROI from his business?)

The possible solutions can be
1. Bring in more financiers into this industry, PSB's should play a major role in this. Even cooperative banks can be approached.
2. Create more competition in the Strategic segments and force the bigger financiers to look at Retail & FTU segments
3. The risk in the Retail & FTU Segments should be mitigated by forming closed groups or associations like the one formed in Tamilnadu, Salem Bus owner association ( Everyone who gets a letter from the association will get a CV loan from Karur Vysya Bank and the association will assist in collections if required).
4. Once the risk is mitigated we will see much more competition in this space and CV customers will benefit from that in terms of easy loan and better interest rates.

V Malik

7 years ago

Prakash - thank you for your comment and query. I hope to answer it in detail in the next two parts. Briefly - the banks and the Finance companies do not directly reach the base of the pyramid - the large number of single vehicle owners/aspirationals - and so the levels of inefficiency are huge. rgds/vm


7 years ago

The article, though informative, is very complex to read and understand. Too many intricacies have been pointed out. If as per your article, financing of commercial vehicles is so complex and difficult, then how come one of the leaders, Shriram Transport Finance Corp is doing good business in financing commercial vehicles which is their core business ?

The Economist: Weak interpretation

The current campaign lacks the wit, sarcasm and the x-factor that one would associate with the magazine’s outdoor ads

Thus far, The Economist has done what it does best: cerebral messages on hoardings, press ads and posters (some of which go over my head, which is a good thing, the mag is for the more serious types). But for their Indian edition, they have come up with TV commercials as well. Clearly an attempt to broad-base the mag and reach out to more towns in India. A super-niche status could be coming in their way of garnering ad revenues.
'Interpret the world' is The Economist's positioning. One commercial features the issue of Chinese kids migrating to India to work in factories. The students are seen learning Hindi at school. Another commercial deals with the graver subject of the civil war in Africa. In this one, two little boys are seen practicing football in the fields. We later notice machine guns are being used as goal-posts.

The observation: In Africa, children take to violence. Both commercials use surprise and contradiction as creative hooks. Namely, Chinese kids learning 'A-aa, E-ee, Aay-o'. And African kids taking up guns. Yup, that element helps the commercials get noticed. And they have resorted to the B&W documentary format to make the films almost newsy, so to speak.
Now while the commercials are nicely shot, etc, there is one significant problem: Both the ideas, particularly the one about the African kids (done to death), lack the wit, sarcasm and the x-factor one associates with The Economist outdoor ads.
I think they have played it safe in India. Probably because they are testing the desi waters. Or, they are worried about the fragile Indian sensibilities to humour and sarcasm. Or, maybe (and I hope not), they are running safe ads so that the idea doesn't go over the heads of the small townies (the segment they are likely to be targeting through the TV commercials). Any which way, the commercials water down the brand personality that has been so carefully cultivated across the world for so many years now.
I think the mag's best bet is to interpret the world in a way that shakes things up a bit, is irreverent, provokes thought, and the ads are unafraid to rock the boat. That's The Economist's famed branding, that's what we like about it, that's what will make it get noticed.
Here's what I would have done (though usually I don't give away ideas for free!): I would have dealt with the Naxal issue, and questioned the rampant mining operations as the root cause of the problem. Now that's making Indian business leaders interpret the violence correctly, right?


Prospects for the eurozone

Ultimately both Europe and the euro will recover despite the dire predictions presently making the rounds

The crisis of the eurozone has rocked markets and again brought into question the stability of the financial system and the strength of the recovery. On its surface, this new crisis would appear to be bad news for investors.
Certainly it is not good news, at least in the short term. Still if you extend the time horizons out a bit further, a different story emerges.

After the devastation of the Second World War, Europe grew at a spectacular rate. In France this period is known as the Les Trente Glorieuses ("The Glorious Thirty"). With the special interest groups swept away by the war, growth benefited all segments of society and the countries as a whole. The growth was given further impetus by the creation of the European Union.

The EU and the euro were supposed to do one thing, encourage economic growth by unifying the market. Market unification of course is a legal problem. If all of the laws, regulations and tax codes could be aligned then seamless trading across national borders would be possible along with growth.

For a time it was very successful. It should be remembered that some of the countries presently so maligned as PIIGS were once lauded for their economic growth. After Ireland and Spain entered the EU their growth rates increased dramatically. Ireland was the Celtic Tiger and Spain had the highest growth rate in the EU after years of stagnation.

But good government policies do not go unpunished. As European economies grew so did the subsidies and regulations. Governments felt that more regulations could solve economic issues and make life better for their citizens. There was no problem that the beneficent hand of government could not solve.

For example in France, in the name of protecting citizens, the French government "sets the dates that shops can hold sales; forbids hypermarkets from selling below cost; limits the number of Paris taxis; and prevents pharmacists from owning more than one pharmacy". The French government employs 8% of the population, almost twice that of the US.

These bureaucracies become self sustaining. Their goal is to protect themselves rather than the rest of the country. A French 'fonctionnaire' retires at 60 at 75% of his or her final six months' salary. The size and cost of the French bureaucracy is certainly impressive but it is not unique. Most of Europe is saddled with massive bureaucracies and of course the costs.
In France 85% of pensions come from the state. This compares with an OECD average of 61% and contrasts with the US where only 36% of pensions are state liabilities. Even worse in both Greece and France the average age of retirement is only 60 compared with 65 in the US and 70 in Japan.

It is not only government employment that clogs the economic system. Most countries in Europe have a two-tiered labour market. There are union workers who have guaranteed jobs, retirements, and healthcare. Then there are the rest, usually the young who suffer from high rates of structural unemployment. As the result of the US recession, America presently has an unemployment rate of 9.9%. This contrasts with Europe where the rate is 10%. But in 2007 the US unemployment rate was 4.4% while Europe's was 7.3%.

The euro crisis then is a symptom of a much deeper disease that has been plaguing Europe long before the present crisis. The use of government and law to solve any problem or to control all segments of the economy has many costs. Not the least of which is that law, any law, any regulation has vast unknown and unintended consequences.

Why then is the present crisis something to celebrate? Laws don't get passed on their own. Certain groups within a political system stand to benefit from a particular legal regime. For example in France there are 35 different groups representing farmers, sailors, teachers and even notaries. Each has an economic stake in the present system and is willing to fight tooth and nail to preserve its rights under that system regardless of any detrimental effect on the general economy. These groups are also not unique to Europe. They exist in varying degrees in all countries. In the US the American Association of Retired People (AARP) is particularly ferocious despite the infirmity of many of its members.

Crises, though, are exceptionally useful. What was considered politically impossible a few weeks ago may actually be feasible today. Real reform invariably removes advantages of a privileged group, which is always difficult and painful. As such, it is invariably put off until there are no other alternatives. Still, over time, once accomplished, the results can be beneficial. The austerity packages making their way through various European parliaments are not only necessary to satisfy the short-term requirements of bond vigilantes; they also will eventually be exceptionally helpful in stimulating economic growth. Not tomorrow certainly. The medicine will be painful as government spending retreats, but what doesn't kill economies can make them stronger. So ultimately both Europe and the euro will recover despite the dire predictions presently making the rounds.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).




7 years ago

In short subsidy is the vilian. Who will bell the cat? HUGE PERKS our politicians squeeze from the masses -what they pocket secretely is another a/c- which we, ordinery citizen, pays by way high prices n rising taxes. It is said rupee has improved in its strength,still we pay more n more for the same item of daily necessities. This puzzle is difficult to solve - Arthachakra

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