Why IPO-bound Tata Cap plans to up used vehicle loans

As it prepares to go public next month, Tata Capital Ltd plans to reduce its reliance on financing new vehicles and increase the share of advances for used automobiles to mitigate the higher cost of bad loans it inherited from Tata Motors Finance Ltd.

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The non-bank financial company has chalked out a plan to improve the quality of the auto financing business and believes it will start showing results in the next two years or so, said a person aware of the discussions who didn't want to be quoted on business plans ahead of the initial public offering (IPO).

“The idea is to increase used vehicle financing to 50% of the book, from 30% at present,” said the person cited earlier. “Financing of used vehicles would lead to better margins, lower loan-to-value (LTV) and better loan yields.”

The Mumbai bench of the National Company Law Tribunal approved the merger of Tata Motors Finance into Tata Capital in May. Before the merger, Tata Motors Finance provided loans to buy new and preowned vehicles and financed transporters and dealers.

As of March, Tata Motors Finance had a loan book of ₹30,227.2 crore and Tata Capital (pre-merger) at ₹1.98 trillion, according to disclosures in the draft prospectus.