From the outside, ‘fools rush in where angels fear to tread’ is a phrase that seems to apply to Kogta Financial (India) Ltd and SK Finance Ltd. After all, the two non-banking financial companies (NBFC) have dipped their toes into a segment that even big lenders found difficult to conquer—lending for used commercial vehicles. But look closely, and you realise they’re poised to pull off something that others thought couldn’t be done.
Both players have portfolios that are heavily driven by used commercial vehicles—40% for Kogta and 70% for SK. They have also seen their assets under management (AUM) grow with a compounded annual growth rate (CAGR) of over 40% over the last five years.
Kogta’s AUM for 2021’s July-September quarter stood at Rs 1,270 crore ($171 million) while SK’s was at Rs 3,155 crore ($424 million), according to a report from investment firm Avendus. Both lenders have also attracted investment from private equity firms, with Morgan Stanley and IIFL investing in Kogta and TPG and Norwest backing SK Finance. Neither Kogta nor SK responded to The Ken’s request to participate in the story.
The two companies have managed this in a segment that saw Poonawalla Fincorp (erstwhile Magma Fincorp) exiting exiting The Ken Poonawalla Fincorp's past could stall its Bajaj Finance like future Read more after dabbling in it for decades; one that has major lenders such as ICICI and HDB Financial Services—a subsidiary of HDFC Bank—accounting for low single-digit market shares. This is according to a financial services analyst at an Indian brokerage.
It’s not a sector for the faint of heart. Writing loans for new commercial vehicles tends to be a somewhat straightforward process—the vehicle, its value, and financing are all readily available within the dealership premises. With a bit of paperwork, an application can be submitted and processed for approval right then and there.
Lending for used commercial vehicles, on the other hand, is much more complicated. There’s no established marketplace, even though there are a lot of sellers and buyers in the market. About 70% of all commercial vehicles sold in the country—around 700,000 units in 2020, according to data provider Statista—usually enter the secondary market for commercial vehicles, two industry executives told The Ken.
The value of the vehicle doesn’t come printed on an invoice, either. This makes it difficult for buyers, most of whom don’t operate large fleets. Large fleet operators tend to buy new vehicles.
For lenders, this is a risky demographic as the economic fortunes of the borrowers aren’t guaranteed like they would be in the case of urban, salaried borrowers.