Does Tractor Finance Make Sense For NBFCs?

Agriculture labour has become scarce and costly, thanks to migration of labour to other activities in rural and urban areas. Hence, use of agriculture equipments and implements are growing at increasing rate. Main such equipment is tractor.

Majority of tractors are sold on credit. Private (non-foreign banks) and PSU banks have been financing tractors’ purchase in rural area for agricultural purpose for a long time; they also finance short term and medium term loan requirements of farmers like crop loan, etc. They have a credit history of farmer-customers.

Indian banks are regulated and required to lend to priority sector within which agriculture falls. Agriculture lending needs to be 18% of the net banking credit of any bank. There is a pressure on banks to meet this target annually. Besides, Government of India and in certain cases, state governments announce periodically write-off of past dues of agriculture loans partly or in full; banks are made good the losses out of write-offs, by the government.

Some of tractors owned by big farmers are also used for transportation of agriculture produce, especially sugarcane to nearby sugar mills.

Also, land holding is getting marginal, thanks to transfer of lands to landless, break up and fragmentation of families.

A tractor is fully employable only if the family owns at least 30 acres of land.  In all other cases, it does not become economical unless it is hired to others for agriculture and transport purpose. Many marginal farmers are currently buying tractors for hiring and make decent income. Can they be put to use through out the year?

Banks especially PSU banks lend at very low rates and for loan periods up to 84 months. Land Development banks lend at thr lowest rates and for periods up to 10-15 years on mortgage of lands. Regional rural banks are also active in this segment. Repayment term is either quarterly or half-yearly.

Bank finances are economical, suitable and comfortable for any rural borrower.  Banks are too eager and prefer doing tractor finance as it is asset based; repossession is technically possible.

Where does NBFCs figure?

Captive finance companies like Mahindra are aggressive because they get finances at good discount from NABARD and Indian Banks; and they have vested interest to push their product. There need not be any other reason for such companies not to be in this segment.

Why should other finance companies be in this business?

They need not be,

·         Unless they get substantial subvention from manufacturer to cover their possible losses

·         Unless they are greedy to be in every product finance business

·         Unless they are desperate to get a part of priority lending funds at lower rates from Indian banks and NABARD

·         Unless they have a good experience already in the rural market

·         Unless they are lending in areas where water is abundant and two crops are raised

·         Unless they want to be a good social citizen, playing a leadership role in the development of rural India

Tractor finance, credit and past due collection

Incomes of farmers are not regular; they are subject to vagaries of nature. So are collections. They are mostly at the interval of 6-12 months. Their banking habits are increasing and are not satisfactory yet. Cash collections are predominant; keeping track of harvest and monetisation is increasingly difficult, cost of tracking being very high apart. Customers’ concentration is sparse and it requires more field collectors. Come along also are the risk of monitoring the field collectors, cash handling and transportation of cash.

Repossession of asset by PSU and land development banks is almost nil; private banks and NBFCs are actively resorting to repossession. Farmers are highly egoistic and emotional; this creates problem of repossession. Most of the times, they intentionally keep them impaired and un-motorable, to avoid easy repossession.

Credit assessment is crusial. Involve as many joint applicants and guarantors as possible; get reputed guarantors like panjayat ex or current president, etc. Briefly, they do not pay up unless there is peer pressure.
Currently, many of the farmers’ heirs are working for regular income in urban centres. It is advisable to learn and involve such regular income family member as either applicant or guarantor.

In brief, it is avoidable by NBFCs.
If not huge losses, this product will not make big money for any finance company in the far term.