Here's What Prompted The Tata Motors Finance Merger With Tata Capital

This would lead to Tata Motors holding a 4.7% equity stake in Tata Capital, as the auto manufacturer is the ultimate parent of Tata Motors Finance.

But what prompted Tata Group to undertake such an operational restructuring? In September 2022, the Reserve Bank of India released a list of top-layer non-bank finance companies, under its new scale-based regulatory framework. Top layer NBFCs are those entities where the regulator feels that there could be significant systemic impact.

Tata Capital and Tata Sons were both included as top layer NBFCs in the first such list. Such entities are required to list within three years of being classified as top layer, putting the Tata Group firms in line for listing by September 2025.

According to a person in the know, Tata Sons has lobbied the RBI to ease requirements set in the guidelines. However, the regulator has remained unmoved. Since then, the group has been working on an alternate corporate structure which does not force a Tata Sons listing.

Whether the RBI will buy the argument is a separate issue, which will get clearer later, the person quoted above said on the condition of anonymity.

Set up in 1984, Tata Motors Finance provides credit for purchase of commercial and passenger vehicles of the group. Alongside, it also provides dealer and vendor financing. Since Tata Capital does not have a major presence in car and commercial vehicle financing, this merger will help expand its loan book.

As of March 31, assets under management under Tata Motors Finance stood at Rs 40,060 crore. However, in the statement on Tuesday, the group said that outstanding loans under the company stood at Rs 32,500 crore. As such, auto loans have relatively shorter tenure and undergo quick repayments, while fresh growth is dependent on auto sales.

Tata Capital's assets under management at the end of FY24 stood at Rs 1.58 lakh crore, where retail loans accounted for Rs 1 lakh crore and small and medium enterprises were at Rs 37,293 crore. Retail auto loans added approximately Rs 19,000 crore.

As of March 31, Tata Motors Finance had a gross non-performing asset ratio of 5.6%, down from a peak of 8.8% in March 2022 and 8.3% in March 2023. In comparison, Tata Capital's gross NPA ratio stands at 1.71% at the end of FY24.

In the last fiscal, Tata Motors Finance pivoted to higher yielding businesses such as utility vehicles and structured financing.

In February, Crisil Ratings revised its outlook on Tata Motors Finance to 'positive' from 'stable'. Its long-term debt instruments carry an AA rating, while the short-term ones have an A+ rating.

"The revision in outlook is in line with the similar action on the outstanding ratings on the debt instruments of ultimate parent of TMFL, Tata Motors Limited," the ratings agency said.

The ratings reflect strong support from Tata Motors, owing to the NBFC's strategic importance as a captive financing arm.

Tata Motors Finance has gone through a rough period of transition between FY12 and FY14, as it had to cover for losses in its credit subvention business, introduced after the global financial crisis. This period was dubbed as the "loss-cover years" by the management.

To counter the global recession and push growth, Tata Motors Finance adopted the manufacturer-guaranteed business model from FY09. Under this, parent Tata Motors offered credit subvention by guaranteeing the losses in case of default on loans. However, till such time as the loss was in provision stage and not crystallised, it was carried on the NBFCs books.

While the MGB model resulted in growth initially, it caused pain later as losses mounted, touching Rs 843 crore in FY15.

Finally, in 2015, the NBFC closed the MGB business and undertook a massive financial restructuring programme under Project Rainbow and Project Phoenix. Apart from cleaning up its balance sheet by segregating bad loans into a new entity called Tata Motors Finance Solutions Ltd., the company diversified its business into used vehicle financing and wholesale debt.

Samrat Gupta, who was the CFO at the time, was appointed as the MD & CEO of Tata Motors Finance in 2017, following his contributions to the restructuring programme.

In a speech in 2021, Gupta said that there were cultural challenges in the newly reformed Tata Motors Finance, when he took over the helm.

For one, the employees were from disparate backgrounds: the old Bureau of Higher Purchase & Credit (which was subsumed into Tata Motors Finance), Tata Motors’ sales team, and from other Tata group and non-group companies. The organisation was inward-looking, laid-back and lacked an independent brand presence, Gupta had said.

With a new board and management team comprising finance professionals at the helm, Tata Motors Finance reorganised itself in FY17. The business was reorganised under three entities: Tata Motors Finance Holding, which is dedicated to the group's auto ecosystem; Tata Motors Finance for new vehicle financing; and Tata Motors Finance Solutions for second-hand vehicle financing and wholesale lending.

This merger is the first step in a restructuring which will put all regulated financial services businesses under Tata Capital. Apart from Tata Motors Finance, the group also has insurance and asset management businesses which are currently under Tata Sons.

Apart from this, Tata Sons will look to repay existing institutional debt, which will address the RBI's concerns over systemic linkages, the person quoted above said. At last count, as of March 31, 2023, Tata Sons' debt stood at nearly Rs 22,000 crore. One of the measures the group has taken in this regard is Tata Sons selling a part of its stake in Tata Consultancy Services Ltd. to raise about Rs 9,300 crore in March.

Over and above this, Tata Sons will also need to prove that its service-related income is higher than its investment income, making it a holding company and not a core investment company.

With a little over a year before the mandatory listing deadline, the clock is ticking for Tata Sons.