Tractor Funding - A "Secured" Business

Originally Written on Jun 21, 2018

"Vivek ! we are in the business of secured funding" announced a classmate of mine who worked for a NBFC. A few of us met for tea, and it was normal to start off a thought trail as many interesting facets of our work come forth this way.

Unsure of which perspective, the statement came from, I quizzically enquired " SO ? ". He said we are better off in performance than many NBFCs.

Wanting to know more, I asked " Ok, So what are you getting at ? "

He quickly responded - " My risk is lower ".. I was quick to respond - " There I differ, my friend ! "  

One of most misunderstood models is that of funding backed by security / collateral. To ensure we are all on the same trail of thought, I have re-scripted the discussion pattern into a blog scheme, which helped me re-look and understand my subject better..... all over a cuppa chai !

-------------- XXXXXX ----------------------

For the benefit of many young friends in the retail finance business, we tend to forget that our main line of business is lending and ensuring that we get our money back.

Collateral is only a safety valve, or more of a stop loss measure. Let's look at the stake holders. 

Let us take the case of tractor finance stakeholders itself. One side it is the dealers and the other it is customers. Both these people have some common patterns.

Generally, to explain this, we use the game of PIPES. This is a game where we need to use connecting pipes to lead the flowing liquid from one end to the other. In each frame of the game,

1. The overall direction can be predicted. However, the time take to complete each stage is different by different people. 

2. In some cases, we use loop pipes to gain time, because the fluid takes time to go through the loop.

3. Every move is time driven. There is an initial head start given, and once the fluid starts time is determined by the speed of the fluid / length of the pipe. 

   
   

This is exactly what our Dealers / Customer do. Each of them identify potential and determine the profit / growth that they would like to achieve. They keep using all aids they get interim to make progress. One of these pipes happens to be finance. 

As secured asset financiers, what we generally mean is that our finance option is backed by some collateral / security offered by the customers. This would mean that the financier is technically permitted to sell the security / collateral to make good the monies borrowed by the borrower / customer. 

Having said that let's have a brief look at the statistics for Tractor Finance based on what we discussed over the tea table :

Let us take a slice of 100 cases

• Genuine cases that run to Arrears              22Cases

• Cases which move into 90+ (NPA)       - From the above 22 Cases :       06 cases

• Cases wherein we have repossessions - From the above 06 Cases :      04 Cases

• Case wherein sale takes place               - From the above 04 cases :        02 Cases

  
  

So, roughly about 9% moves into sale. Yet another interesting perspective is that 4 cases which accounts for another 18%, is prevented from going bad because of hypothecation / collateral. 

The other fact that we gathered - 50% of the cases, where repo and sale took place, registered a loss of revenue for the financier. 

We progressed to then map notes on statistics and draw up a risk matrix. The results of the same worked out on scales :

(a)         Level 1 -  Who was the most influential in a customer making a purchase and thereafter running the project ably ?

(b)         Level 2 - Which of these influencers had the maximum impact in terms of repayment ( financed vehicle )?

It was also interesting to note the following facets came out :

1. The Sales Executive segment, is the most immature segment of the pie and yet, it is this connect that has the highest amount of influence, followed by Service Agent.

   
   

2. All Financiers irrespective of background - PSU Bank, Private Bank, NBFC, or MFI, played a benign role as people who merely came forward to lend. Involvement in the business cycle of the customer was noted to be low or near absent.

   
   

3. The customer considers opinions and information gathered by self, and juxtaposes the same   against information presented to him. The Rural Customer of today is more informed. Thanks to     technology and various attempts made by various bodies and corporates to empower and  enlighten these rural customers.

   
   

4. Amongst factors names, Model based issues and Servicing related issues highest probabability of cases going into arrears.

   
   

So, we summed up that the financier :

1. Compensated for his low involvement in the process by using the traditional process of Security / Collateral.

   
   

2. The Security / Collateral, in itself had a high probability of loss attached, and in case of delay / arrear in payment, the situation would be better than being unsecured.   

   
   

Yet, a financier who takes on this risk without the collateral like a pawn broker / local money lender, attacked this very same segment, has had a better track.

In these segments, the collections capability and strategy also plays a very major role. 

So, security / collateral is a make over / damage control mechanism, that allows us to reduce damages in case of repayment issues. It does not reduce the risk associated with repayments.

However, the exception to this category would be land / building in any form, which have a psychological impact. Yet, the tractor finance has moved far away from those days when we could ask for a land / property as collateral to fund a tractor. 

All over a cuppa chai !!