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
1 decade 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
1 decade 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
Replied to Rakesh Agarwal comment 1 decade 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
1 decade 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
Replied to Saurabh Maheshwari comment 1 decade 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

Replied to V Malik comment 1 decade 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
1 decade 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
1 decade 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 ?
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