The Economic Times
Captive financing arms of auto companies have a stricter tier-I capital ratio requirement than non-captives. That should change, says Sidhartha Nair, Managing Director of Daimler Financial Services India, a Daimler arm, begs to differ. In an interview with ET, he says captives have a big role to play in markets such as India.
With India having a well-spread-out network of banks and non-banking financial companies, is there a need for captives?
In India, 70% of the cars and 95% of the trucks are financed. So we have a big role to play. In established markets, manufacturers almost get double the repeat business when cars/trucks are financed by the captive (compared to other financial institutions). We talk to customers every month. (We ask) “Have you checked out the new Mercedes Benz car? Would you like test drive?” We hardly spend time on money collection. This is only possible in a captive. That’s the reason you see big automobile manufacturers having captives.
But, in India, manufacturers have been in and out of the captives business?
In the last 40 years, we have been across the markets and never shut our operations. In many captives in India, the balance sheet isn’t kept separately from the parent, so visibility is less. We are an independent and separate company. I should ensure that the 100 million euro investment should deliver return to Daimler shareholders. I cannot tell them I helped sell more Mercedes-Benz cars and Benz trucks, and in the process destroyed the money. That independence is often misunderstood and forgotten in many captives in India. There’s a sea-change in last 4-5 years with foreign captives coming in.
So what are the changes you have brought in?
We operate on a branch-less model, operating out of dealerships. We have a sales organisation on the manufacturing side and also on financial services side. They both make sure the right product and right financial services are provided.
Definitely I am not the cheapest lender out there. What we offer is a value proposition. We were the first to offer operating lease solution in the country. About 10% of our business comes from operating lease. You as an individual running a self-employment or small business have significant tax advantage. Over a three-year ownership cycle, the amount of money coming out of you to own this (Mercedes-Benz) car is lower than if you were to finance it over a three-year period.
We also started offering a residual-value solution. Typically, Indian customers replace their vehicles every three or four years. So, (if so) why do you need to pay interest on the full amount? So, a four-year car, we can buy back from you for 40% of the value. We give you that guarantee today.
In trucks, we brought in branded insurance. In India, third-party is the way things have been done. So we have cashless services support at dealerships. Today, one in three BharatBenz trucks is financed by us. And about 50% of all BharatBenz trucks is insured with us.
What’s your current portfolio size?
Portfolio is around Rs 1,500 crore. We do about Rs 100-125 crore business every month, and that continues to increase as volumes go up. Car is 80% of the business (20% trucks). Another way to say is 40% of business is dealer inventory and 60% is end-customer retail business. Our projection is, this will become 30% dealer inventory, 70% customer business. Eventually, it will become 50:50 car and truck. There have been no delinquencies due to the slowdown. It is less than 1%. We have 4,000 customers.
What do you think are the regulatory challenges?
The tier I capital ratio requirement is 12% (for captives) whereas everybody else (non-banking financial companies) can have 10%. We do not understand why we are punished.
If we are getting differentiated because we focus on a particular manufacturer, we should also be provided with funding opportunity in (the form of) external commercial borrowing, at least for commercial vehicles. Because the regulator can track where the money is being invested. But the regulator refused to accept the argument.
I can understand apprehensions about wanting funds for buying Mercedes-Benz cars. That might not be job creation, even though I beg to differ. But I can appreciate it. Today, one of the pain points for us is not being as price competitive as others. If I am allowed to borrow in euro, I can offer much cheaper loans.
Any plans for a further fund infusion?
When we came in two years ago, we brought in 100 million euros. At 15% capital adequacy, we do not need any money anytime soon. We can grow up to Rs 4,000 crore (with this), which should happen in the next two years.
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