Vehicle finance companies lobby for more sops

Commercial vehicle finance companies have sought more sops from the Reserve Bank of India, including halving the risk weights for the segment to 50 per cent.

The move is aimed at helping them reduce the interest rate on loans for purchase of commercial vehicles and free up additional capital to meet the higher capital adequacy ratio requirement. Non-banking finance companies (NBFCs) have to maintain a capital adequacy ratio of 12 per cent, which is to go up to 15 per cent from April, 2010.

Ahead of the credit policy, NBFCs have approached the central bank through industry lobby Finance Industry Development Council (FIDC). In addition, the vehicle finance companies want an extension of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act to the segment to help them repossess vehicles along with a borrower’s property where loans are overdue.

“As of now, we can only repossess the vehicle and sell it in case of a default, which is not adequate in terms of the actual realisation of the value of the asset. At a time when defaults are rising, other properties such as land and apartment should be attached with the asset financed as is the case with banks. This will help us improve our asset quality and discourage defaults,” said the head of a Mumbai-based NBFC.

FIDC has also demanded that all provisions related to non-performing assets (NPAs) should be included as deductions under the Income Tax Act along with the abolition of service tax on the interest portion on lease and hire and purchase of vehicles.

Sources at the central bank said no decision has been taken so far. “Despite the slew of measures from RBI, the liquidity position for vehicle financing firms has not improved, so we made a representation to the central bank seeking three measures to get a level-playing field with the banks,” said the head of an NBFC, with interests in vehicle financing.

At present, all loans sanctioned by NBFCs attract 100 per cent risk weight. This implies for a loan of Rs 100 sanctioned, an NBFC has to set aside capital worth Rs 100.

The demand comes at a time when many finance companies are struggling to maintain the existing requirement of the 12 per cent capital adequacy ratio, said an executive at another NBFC.

“Though RBI allowed the non-deposit taking NBFCs to improve their capital position by issuing perpetual debt, it has not been effective so far,” he added.