Financing consumer durables is the in thing amongst lenders these days. The latest to enter this segment is the Chennai-based truck finance major Ashok Leyland Finance Ltd. The reasons? The car finance segment has become very competitive and is nearly monopolised by foreign banks. On the other hand, demand for commercial vehicles is playing a seesaw game. On the big ticket lending - corporate side - several accounts are getting sticky.

Given this situation, financial institutions have to look at other avenues for parking their funds. And the one area of profitable credit deployment is financing of consumer durables purchases. It should be noted that the housing finance industry is doing well. Now a new house means at least one or two new consumer durables purchases. However, there are low spreads in retail lending.

"The future growth of any finance company hinges upon process efficiencies and the ability to carry on profitable operations by handling volumes in a low margin regime," reasons Mr S Nagarajan, managing director of ALFL.

Ashok Leyland Finance is holding parleys with consumer goods dealers and retailers for pushing its financing product. "In this business, consumer goods dealers are the fulcrum," says Mr Nagarajan. According to him, the company will not be appointing any direct selling agents for selling its consumer durables loans. "We will leverage our 140 branch offices spread nationwide, and our proposed portal for the purpose." On the other hand, the company will engage chartered accountant firms for appraising the loan proposals.

"We plan to disburse around Rs 100 crore this fiscal and gradually ramp up the volumes to Rs 300 crore in three years' time," Mr SV Parthasarathy, vice president - operations, says. The company will be matching competition on zero per cent interest plans that are offered by bigger players like ICICI. ALFL is talking to some consumer durables manufacturers for the purpose.

"But what most of the non-banking finance companies including us can't match big player competition like ICICI, GE Capital on, is the cheap cost of finance available to them," says Mr Nagarajan. According to him, in retail financing the spread will have to be not less than five per cent for a financier to be viable. "The cost of managing a retail loan is around two per cent, and other risks like interest rate fluctuations are also to be factored in."

The growth in disbursements and the reduction in interest incomes tell the tale of thinning industry margins. For the year ended June 30, 2000, the company disbursed Rs 953 crore and earned Rs 184.30 crore as against a disbursement of Rs 906 crore and income of Rs 214.98 crore clocked the previous year.

The company's debt:equity position also affected its disbursements. In order to set right the mismatch and attain a comfortable capital adequacy ratio, ALFL raised Rs 51 crore issuing nine per cent cumulative convertible preference shares on rights basis. After the issue, the capital adequacy ratio stands at a comfortable 20.14 per cent, which is well above the minimum of 12 per cent stipulated by Reserve Bank of India.

On the expenditure side, the company's financial charges last financial year stood at Rs 150.51 crore as against Rs 188.84 crore registered the previous year. Reining its cost of finance to less than 12 per cent, ALFL closed the year with a profit of Rs 20.25 crore compared to Rs 15.01 crore booked the previous year. The company wrote off sticky accounts to the tune of Rs 14 crore.

With public deposits becoming costlier, the company raised Rs 375 crore from the debt market. The other source of fund tapped by it was securitisation of its receivables to the tune of Rs 340 crore last year. "Fixed deposits have become very costly now. We don't actively canvass for deposits, though we don't refuse either when any deposits come in our favour," remarks Mr Nagarajan. The company's total deposit stood at Rs 246 crore at the end of last fiscal as compared to the previous year's figure of Rs 300 crore.

According to N Sampath Kumar, vice president - finance, during the year ALFL plans to tap the following sources for funds: securitisation of its receivables (Rs 400 crore); commercial paper (Rs 200 crore); and FCNR (B) loan (Rs 200 crore). The working capital limit with the consortium of banks have been renewed at Rs 480 crore for the current year.

For this year, the company is targeting a disbursement of Rs 900 crore in the nine months period. "This works out to an annualised growth of 25 per cent," remarks Mr Nagarajan.