Introducing GrowFix Wheels — Asset having a pool of vehicle backed loans!
When we decided to launch GrowFix Wheels, we thought let’s talk to some retail investors before and understand how they perceive vehicle loans and then explain GrowFix wheels.
To be honest, the perception about vehicle loans isn’t that good compared to gold loans business. We thought let’s compare GrowFix Gold and GrowFix wheels, and explain how investing in GrowFix Wheels is as safe as investing in GrowFix Gold.
Here are the primary differences between the underlying loans:
Now let’s look at every difference one by one and understand it:
- Vehicles are depreciating assets.
That is true. As soon as the new vehicle is bought, the resale value goes down by 10–15%. Then the vehicle depreciates slowly over the next ten years before being scrapped.
There are two ways in which we tackle this.
A. Choosing loans where the loan amount is less than 85% of the value of the vehicle.
The vehicle value is ₹ 5 Lacs, generally the loan amount Rs. 4 Lakhs(~80%). In case the borrower doesn’t pay even one EMI, the NBFC can sell the vehicle and recover the entire loan amount.
While choosing loans for our portfolios, we will always select a portfolio where the borrower has paid at least one EMI. So we are sure that the borrower has the intention to pay.
In the coming GrowFix Wheels’ asset, the average loan amount is 72% of vehicles’ value.
B. Choosing the majority of loans where the borrower has taken the second-hand vehicle.
A vehicle depreciates most in the first three months and then it declines very slowly. So when the borrower buys a second-hand vehicle, the value doesn’t decrease immediately as it does in new vehicle loans. So the majority of loans in our portfolio are second-hand vehicle loans.
In the coming asset, out of 850 Loans that we are financing, ~95% of the loans are second-hand vehicles.
Here is the Graph of how vehicle resale value and loan outstanding changes over time.
We have assumed the vehicle value to be ₹ 8 Lakhs and initial loan value to be ₹ 6.8 Lakhs( 85% which is much higher than avg of 72% of current portfolio)
Please note that as long as the borrower pays the first EMI, the loan outstanding is always less than the vehicle’s resale value.
So the depreciating risk is well-taken care of!
2. The vehicle is with the borrower.
In gold loans, the gold is with NBFC; if the borrower doesn’t pay, NBFC can quickly sell it.
In case of vehicle loan, the vehicle is with the borrower. What if the borrower runs away with the vehicle? That’s a legit question.
Most of the cases, the borrowers can’t run away because NBFC has borrower’s all addresses. Including the permanent one where borrower’s family resides. On top of that, if the borrower wants to run away, s/he has to leave all other properties, social relations and run. So people generally give up the vehicle to the NBFC.
Apart from that, some people do try to run away. So the NBFC has specialized teams to track the vehicles and get them back. It is a pretty interesting team that works like spies and figures out the borrower’s location and the vehicle.
In general, all the NBFCs we are working with in vehicle finance, generally, seize 90% of the total vehicles were borrowers don’t pay.
So that is a pretty high number, and it is more or less same over the last ten years.
There is one more counter-intuitive thought here which deserves attention.
In gold loan NBFC, the gold is stored at NBFC’s local branches. In case the NBFC goes bankrupt, segregating our portfolio loans, moving it to another place, and closing the loans- can become a lengthy process as NBFC is run by someone else. It can become messy if the new administration doesn’t co-operate.
In vehicle loans, the vehicle is with the borrower. So it’s very, very easy to co-ordinate and take over the loans. In a way, it is a blessing in disguise.
3. Reselling of vehicles is difficult.
Intuitively, it seems like liquidation of gold is easy but reselling of the vehicle is difficult.
That was the case before. But now with the advancement of technology, all vehicles’ reselling happens quickly over the web. There are multiple platforms where brokers buy these second-hand vehicles immediately.
Does that mean there are no losses at all? Nopes!
Gross NPA is 3–4%, 90% of vehicles are recovered and sold. Generally, there are about 1% Net losses in vehicle loans. So how do we cover for it? By taking additional loans. In every vehicle loan pool, we take around 20% extra loans as security — about 10–20 times cover than the expected NPA. So the losses are covered well!
In the next GrowFix Wheels Asset, the transaction size is 20 Cr. The net NPA is expected to be ₹ 20 Lacs. To cover that we have additional loans of ₹ 4 Cr. ( About 20 times the expected NPA). The total loans as security are of ₹ 24 Cr. The value of the mortgaged vehicles is ₹ 33 Cr+.
All in all, we believe that GrowFix Wheels is as safe as GrowFix Gold. If it weren’t the case, we would not bring the asset on platform.
Now, given that all points are covered, one questions might persist. Why are we not just doing GrowFix gold and launching GrowFix wheels?
The answer is diversification! We don’t want to invest in just one asset of gold-backed loans. And we recommend the same to investors on GrowFix platform- invest across all assets. Don’t invest all the money in one asset. Diversify it across all the assets on the platform.
So we are, ready to launch our next asset: GrowFix Wheels!