Loan-to-Value = LTV
It is good to be in asset financing as assets become collateral to the loans offered by banking and non-banking institutions. It is on the premise that when loan repayments are delayed, the lenders could have recourse to assets by taking possession of assets and disposing them to realise the outstanding.
It may be true if the lien is marked, the company has capacity to repossess and loan to value, say LTV is appropriate.
Many lenders may not verify, inspect assets and may not ensure lien marking properly and accurately. When the lien is not marked, it becomes 'clean' loans, call it unsecured loans,etc. This is a major operational problem especially when the loan is already disbursed. Worse, many lenders depend on 'service providers' to complete the lien marking. The lenders and its executives never get to see or verify the originals as only 'copies' are churned out by the services providers, leading to huge ineffectiveness, inefficiency or even fraud in this area. Non-lien marking helps the borrowers to dispose the asset fraudulently and bonafide buyers will never know that the assets are tainted.
This apart, loan-to-value (LTV) wrongly and fraudulently applied by appraisers create huge losses to lenders. Appraisers and underwriters are, many a time misled by inflated information on value of the assets. Some marketing jokers in finance business use their clout with management to dismantle any good underwriting policy and process in place. They are forced to have different definitions at different times , leading to LTV exceeding the acquisition cost of the asset by borrowers; it is precisely the intention of bad customers. Lenders end up buying the 'pure' risk.
Many companies try to finance, to win more customers and to achieve higher sales, all that borrowers spend on the assets. For example, many governments collect huge money as road tax upfront for life time. This does not add any value to the working of an asset, say Truck. The same must be allowed to be financed by borrowers from his own funds; companies may take only ex-dealers price as 'value' and it may not include any add-ons/ extra-fittings' values.
Value of an used-asset is too difficult to arrive,especially if they are depreciating assets like auto cars, trucks,etc.In the case of used-vehicles financing, many valuation models and processes are followed to arrive at the 'right ' value. Very little success is achieved in India, with lack of red/ blue books available elsewhere as reference. Appraisers are misled by wrong valuation reports generated by influenced insurance surveyers/ valuers, to achieve the desired 'finance amount'.
The best policy and process are to have a own quantitative discounting model based on brand, make, model, age, usage, etc. This should reflect, may be up to maximum of 120% of sale price of its repossessed / seized vehicles, sold by the company.
More importantly, LTV may not be model or asset specific but borrower specific. Again, a quantitative score model developed on factors/ information which may reveal his 'ability' and 'intention' to repay.The score may decide the range of LTVs that may be considered as good , read along with many qualitative information in application, that appraiser may have access to.
What if the top man is a 'sales guy' and thinks that profits flow from sales, so sales alone are important. He may not agree in the short term that credit losses reduce profits in the long run.
LTV is also called Loan-to-Cost or Credit-to-Cost. This ratio claculated accurately for the company as a whole is used a measure of credit; lower LTV/LTC/CTC means better credit underwriting and lower risk.
It may be true if the lien is marked, the company has capacity to repossess and loan to value, say LTV is appropriate.
Many lenders may not verify, inspect assets and may not ensure lien marking properly and accurately. When the lien is not marked, it becomes 'clean' loans, call it unsecured loans,etc. This is a major operational problem especially when the loan is already disbursed. Worse, many lenders depend on 'service providers' to complete the lien marking. The lenders and its executives never get to see or verify the originals as only 'copies' are churned out by the services providers, leading to huge ineffectiveness, inefficiency or even fraud in this area. Non-lien marking helps the borrowers to dispose the asset fraudulently and bonafide buyers will never know that the assets are tainted.
This apart, loan-to-value (LTV) wrongly and fraudulently applied by appraisers create huge losses to lenders. Appraisers and underwriters are, many a time misled by inflated information on value of the assets. Some marketing jokers in finance business use their clout with management to dismantle any good underwriting policy and process in place. They are forced to have different definitions at different times , leading to LTV exceeding the acquisition cost of the asset by borrowers; it is precisely the intention of bad customers. Lenders end up buying the 'pure' risk.
Many companies try to finance, to win more customers and to achieve higher sales, all that borrowers spend on the assets. For example, many governments collect huge money as road tax upfront for life time. This does not add any value to the working of an asset, say Truck. The same must be allowed to be financed by borrowers from his own funds; companies may take only ex-dealers price as 'value' and it may not include any add-ons/ extra-fittings' values.
Value of an used-asset is too difficult to arrive,especially if they are depreciating assets like auto cars, trucks,etc.In the case of used-vehicles financing, many valuation models and processes are followed to arrive at the 'right ' value. Very little success is achieved in India, with lack of red/ blue books available elsewhere as reference. Appraisers are misled by wrong valuation reports generated by influenced insurance surveyers/ valuers, to achieve the desired 'finance amount'.
The best policy and process are to have a own quantitative discounting model based on brand, make, model, age, usage, etc. This should reflect, may be up to maximum of 120% of sale price of its repossessed / seized vehicles, sold by the company.
More importantly, LTV may not be model or asset specific but borrower specific. Again, a quantitative score model developed on factors/ information which may reveal his 'ability' and 'intention' to repay.The score may decide the range of LTVs that may be considered as good , read along with many qualitative information in application, that appraiser may have access to.
What if the top man is a 'sales guy' and thinks that profits flow from sales, so sales alone are important. He may not agree in the short term that credit losses reduce profits in the long run.
LTV is also called Loan-to-Cost or Credit-to-Cost. This ratio claculated accurately for the company as a whole is used a measure of credit; lower LTV/LTC/CTC means better credit underwriting and lower risk.
