Structured Finance

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STFCL CV Trust Feb 2013 New Issue

Capital Structure

Class

Principal Outstanding

(INRm) Final Maturity

Long-Term Rating CE

a (%) Outlook

TT (%)

TTLM (x)

b

Complexity Indicator

c

Series A PTCs

4,460.5 July 2017 IND AAA(SO) 13.2 Stable 100 64.1 High

Second-Loss Credit Facility

365.8 July 2017 IND A(SO) 5.0 Stable - - High

Closing Update: The transaction was closed on 28 February 2013. This report includes the key characteristics of the transaction as of the closing date a Credit enhancement as a percentage of future principal outstanding as of 31 January 2013

b Details are provided in “Structured Finance Tranche Thickness Metrics”, 29 July 2011

c Ind-Ra‟s complexity indicators are an opinion on the relative complexity of a broad category of instruments expressed on

an ordinal scale of „Low Complexity‟, „Moderate Complexity‟ and „High Complexity‟. „High Complexity‟ refers to an instrument where the relationship between the numerous interdependent risk factors and intrinsic return characteristics is highly involved, requiring forward-looking analysis and projections

Transaction Summary

The transaction is a securitisation (par structure) of a pool of used and new commercial vehicle

(CV) loans originated by Shriram Transport Finance Co. Ltd. (STFCL, „IND AA‟/Stable/„IND

A1+‟). The expected ratings are based on the quality of the collateral, the originating and

servicing capabilities of STFCL, the financial structure of the transaction and the available

credit enhancement (CE).

The expected rating of Series A pass through certificates (PTCs) addresses the timely payment

of interest and principal by the scheduled maturity and the expected rating of the second loss

credit facility (SLCF) addresses the ultimate payment of principal by the scheduled maturity, in

accordance with the transaction documentation.

Key Rating Drivers

Available CE: The available external CE of 13.2% is higher than India Ratings & Research

(Ind-Ra) break even CE of 11.17% of initial principal outstanding (POS) for the target rating of

„IND AAA(SO)‟, providing greater cushion in times of stress.

Performance: Ind-Ra maintains ratings on over 30 transactions originated by STFCL where

the 90+ days past due (dpd) delinquency ranges between 0% and 5.5% of initial POS.

Base Case Default Rate: Ind-Ra has derived the base case net default rate from historical

static pools for loans originated from January 2003 to July 2010 which covers reasonable

stress in the Indian economy in 2008-2009. The agency has assumed a base case net default

rate that reflects the stressful economic environment.

Asset Outlook: The muted industrial freight demand along with margin pressures for truck

borrowers has led to challenging times for CV operators. However, broad-based economic

growth, mostly focused on domestic consumption, limits downside risk in CV loan pools. Ind-

Ra‟s outlook on the CV loan asset class is Stable to Negative (2013 Outlook: Indian Structured

Finance, published 31 January 2013).

Rating Sensitivity: An analysis was conducted to study the impact on the rating of changes to

the assumed base case default rate and recovery rate. If the assumptions of both these factors

were individually worsened by 20%, the model-implied rating sensitivity suggests that the rating

will be downgraded by one notch.

Inside this report

Transaction Summary 1 Key Rating Drivers 1 Transaction and Legal Structure 2 Disclaimer 4 Asset Analysis 4 Liability Analysis 8 Rating Sensitivity Analysis 9 Counterparty Risk 9 Performance Analytics 10 Appendix A: Origination and Servicing11 Appendix B: Pool Characteristics 15 Appendix C 17

Related Research

2013 Outlook: Indian Structured Finance (January 2013)

Shriram Transport Finance Co. Ltd.: Credit Update (May 2012)

Inside Commercial Vehicle Loan ABS (December 2012)

Analysts

Purav Shah +91 22 4000 1764 purav.shah@indiaratings.co.in Jatin Nanaware +91 22 4000 1761 jatin.nanaware@indiaratings.co.in

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STFCL CV Trust Feb 2013

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Data Adequacy, Criteria Application and Model

STFCL has provided Ind-Ra with a set of data which includes key data fields used in the

agency‟s analysis of CV loan pools. STFCL also provided the agency with loan-by-loan data for

the current pool. The static pool data provided belonged to 12 vintages from 2001 to 2012 and

contained aggregated default rates by origination month, up to June 2012. Dynamic data

exhibiting delinquency rates by parameters such as geography, loan-to-value (LTV) ratio and

internal rate of return (IRR) was also made available.

The methodology used to rate the transaction is based on Ind-Ra‟s India ABS Criteria Report,

Rating Criteria for Indian Asset Backed Securitisations and Structured Finance Rating Criteria,

both published 12 September 2012 (see Applicable Criteria).

Ind-Ra‟s analysis used two models - the simulation model and the cash flow model. The former

was used to estimate gross default from net default rates. The cash flow model was used to

test whether the stressed asset cash flows as well as the CE provided in the transaction were

able to cover timely interest and principal payments for Series A PTCs and the ultimate

payment of principal for the second loss credit facility.

Transaction and Legal Structure

The transaction has a par structure where the pool is assigned for a purchase consideration

equal to the pool‟s principal balance. The underlying loan receivables, including security

interest in any underlying assets, have been assigned to the trust for the benefit of the PTC

investors. Through such an assignment, the PTC investors have become the absolute legal

and beneficial owners of the respective loan receivables.

Figure 1

Payment Structure

The future payouts from the pool for each month will be collected by STFCL and deposited in

the collection and payout account (CPA) in the name of the trust, maintained with the approved

bank, not later than two business days before the scheduled payout dates. The PTC payouts,

consisting of the collections from the amounts due, amounts overdue and prepayments in the

month (M), are payable in M+1. This exposes the transaction to commingling risk. This risk is

mitigated by the current Short-Term Rating of the servicer and certain structural mitigants

mentioned in the transaction documents (see Counterparty Risk section).

Priority of Payments

On the payout date, the payments will be made from the available distribution amount in the

following order of priority:

Structure Diagram

Note: This diagram represents India Ratings‟ interpretation of the transaction structure as represented in the transaction

documents

Source: Transaction documents

CE Provider

Originator/Servicer

PTC Investors

Trust

Underlying Borrowers

PTC Payouts

PTC Issuance

PTC Issuance Proceeds

Periodic Collections

Assignment of Loans

Purchase Consideration

Loan Repayment

Loan

Key Information

Pool Assets: Secured used and new

CV and passenger vehicle loans

Originator: STFCL

Servicer: STFCL

FLCF Account Bank: Axis Bank Ltd

FLCF provider: STFCL

SLCF provider: Axis Bank Ltd

Approved Bank: HSBC Ltd, India

Branch

Trustee: IDBI Trusteeship Services

Limited

Transaction Structure: Par

Pool Cut-off Date: 31 December 2012

Opening Principal Outstanding:

INR4,593.8m (as on Pool Cut-off date)

INR4,460.5m (as on 31 January 2013)

Series A PTCs Outstanding:

INR4,460.5m (31 January 2013)

Scheduled Pool Maturity: June 2017

Scheduled Maturity for the PTCs:

July 2017

Applicable Criteria

Structured Finance Rating Criteria (September 2012)

Rating Criteria for Indian Asset-Backed Securitisations (September 2012)

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STFCL CV Trust Feb 2013

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Figure 2 Summary of Payments Waterfall

1 Statutory or regulatory dues payable by assignee 2 Any fees and expenses (if any) 3 Overdue interest and principal payouts to PTC investors 4 Scheduled interest and principal payouts to Series A PTC investors 5 Any prepayments received will be passed through to PTC investors 6 Replenishment of SLCF to the extent of utilisation 7 Replenishment of FLCF to the extent of utilisation 8 Any residual amount would be paid back to the seller

Source: Transaction documents

Credit Enhancement

The transaction benefits from CE in the following forms:

The internal CE is in the form of excess interest spread (EIS), which, according to the schedule, is 9.5% of total pool principal outstanding (POS). This arises as a spread between the underlying pool IRR and the scheduled coupon to be paid to PTC investors.

The external CE in the form of fixed deposits (13.2% of total POS) will be made available to cover shortfalls on account of default (90+dpd loans), temporary delinquencies (0-90 dpd loans) and pool prepayments. The external CE is higher than Ind-Ra‟s break-even CE of 11.17% for the target rating of „IND AAA(SO)‟.

The external CE is divided into a first loss credit facility (FLCF) of 5.0% of total POS and an SLCF of 8.20% of total POS. The FLCF is provided by the originator in the form of fixed deposits - with an account bank (Axis Bank Ltd., „IND AAA‟/Stable) - in the name of the originator with a lien marked in favour of the trustee. The SLCF is provided in the form of an unconditional and irrevocable guarantee from the SLCF provider (Axis Bank) and is payable on demand till all the payouts are made.

Clean-Up Call Option

The originator/seller has a clean-up call option to repurchase fully performing residual loan

assets at par if, in aggregate, they form less than 10% of the original securitised pool balance.

This option will be applicable only to the performing assets at the sole discretion of the seller.

Legal Analysis

Ind-Ra reviewed the final transaction documentation to understand whether the terms and

structure of the transaction conformed to information previously received.

The key documents related to the transaction include the following:

the trust deed

the assignment agreement

the power of attorney

the SLCF guarantee agreement

The legal opinion provided by the transaction counsel opines on the following key issues:

Enforceability of documents: The transaction documents have been duly authorised, executed and delivered and constitute legal, valid and binding obligations of the parties thereto and are enforceable against each of them in accordance with their terms.

Adherence to the Reserve Bank of India (RBI) guidelines and true sale: The transaction complies with the RBI Guidelines on Securitisation of Standard Assets dated 1 February 2006, 7 May 2012 and 21 August 2012. The assignment of the assets by the seller to the trustee by way of the deed of assignment satisfies the test of a true sale as set out under the securitisation guidelines.

Bankruptcy remoteness of assets: The assets purchased by the trustee are held by it in trust for the benefit of the PTC holders and therefore would not form a part of the originator‟s assets in the event of liquidation or winding up of the originator.

Bankruptcy remoteness of FLCF from the seller: The FLCF provided as fixed deposits in an account bank, in the name of the originator, to be held in trust for the benefit of trustee with a lien marked in favour of trustee. The FLCF thus provided is bankruptcy remote from

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STFCL CV Trust Feb 2013

May 2013 4

the originator. (see Counterparty Risks section)

Nature of bank guarantee: The SLCF agreement stipulates that the SLCF is irrevocable and unconditional and shall be payable on demand made by the trustee.

Valid constitution of the trust: The trust is validly constituted under the trust deed and will be recognised as a duly constituted trust over the assets against any liquidator, receiver, administrator or other insolvency official of the trustee following insolvency of the trustee.

Adherence to minimum retention requirement (MRR): The transaction adheres with the MRR requirement as per the RBI‟s Securitisation Guidelines of 2012.

Disclaimer

For the avoidance of doubt, Ind-Ra relies, in its credit analysis, on legal and/or tax opinions

provided by transaction counsel. As Ind-Ra has always made clear, Ind-Ra does not provide

legal and/or tax advice or confirm that the legal and/or tax opinions or any other transaction

documents or any transaction structures are sufficient for any purpose. The agency draws your

attention to the disclaimer at the foot of this report, which makes it clear that this report does

not constitute legal, tax and/or structuring advice from Ind-Ra, and should not be used or

interpreted as legal, tax and/or structuring advice from Ind-Ra. Should readers of this report

need legal, tax and/or structuring advice, they are urged to contact relevant advisers in the

relevant jurisdictions.

Asset Analysis

Ind-Ra‟s asset analysis of the pool is based on a four-step process.

Step 1. An originator and servicer review

Step 2. Analysis of asset characteristics of the pool

Step 3. Base case assumptions are derived for three key performance variables: defaults, recoveries and prepayments (based on historical data as well as the economic environment and asset class outlook)

Step 4. Stressed scenarios are applied for the rating level

Originator/Servicer

Ind-Ra conducted a complete review of the originator/servicer of this transaction, and such a

review will typically be conducted at regular intervals. Ind-Ra‟s originator/servicer review

included an assessment of the origination and credit appraisal processes, the credit

underwriting process, collection and recovery processes, operational and financial stability, and

the soundness of its internal control procedures.

Ind-Ra has conducted the latest on-site operational review in October 2012 at Mumbai. The

agency is of the opinion that STFCL‟s origination and servicing capabilities are of an

acceptable standard. For the detailed originator and servicer review, refer to Appendix A.

The strengths and weaknesses of servicing and origination functions of STFCL are as follows:

Strengths Increase in the number of field officers in tune with the rise in disbursement volumes in

recent years.

Officers who source the loans are also in charge of collections and a part of their salary is linked to the collections.

Along with relationship-based credit appraisal, a thorough review of the underlying obligor and the vehicle is conducted. STFCL maintains a valuation of around 700 products, which is updated frequently.

Weaknesses and Mitigating Factors The resolution of delinquent accounts is mainly focused on persuasion rather than that of

repossession. This may not be very effective in the current scenario where the earning capacity of the obligor will be under pressure owing to a slowdown in the economy. This weakness is mitigated by the fact that STFCL always has the option to repossess the asset to recover the loan amount,

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STFCL CV Trust Feb 2013

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If the levels of originations increase beyond a certain limit, STFCL may find it difficult to replicate the cash collection model in future. In the past, the management has proactively increased the number of back-office personnel to address the increased level of workflow. It is probable that if workflow increases in future, the management will take a similar action.

Asset Characteristics

Figure 3 Pool Characteristics (As of Pool Cut-Off Date of 31 December 2012) Characteristic

Number of loans 11,186 Total principal o/s (INRm) 4,593.8 Total receivables o/s (INRm) 5,649.1 Average original loan (INR 000) 562.3 Average loan balance (INR 000) 410.7 Weighted average (WA) original LTV (%) 65.5 WA seasoning (months) 12.3 WA IRR (%) 14.2 WA original tenor (months) 51.1 WA balance tenor (months) 38.5 WA pool amortisation (%) 24.8 Delinquent (one month) (%) 14.4

Source: STFCL, Ind-Ra

Positive collateral characteristics include the following:

a diversified pool with presence in over 20 states. Andhra Pradesh contributes 30.2% to the pool. As per Ind-Ra‟s analysis on past rated pools, Andhra Pradesh is one of the better performing states with average 90+dpd being lower than long-term average observed at similar levels of seasoning. [See Inside Commercial Vehicle Loan ABS, published in December 2012]

adherence to minimum holding period requirement has led to WA seasoning of 12.3 months and WA amortisation of 24.8% implying a significant repayment track record

WA IRR of pool at 14.2% is significantly lower than portfolio indicating superior borrower credit quality than portfolio

Negative collateral characteristics include:

14.4% of the loans on cut-off date are one month overdue loans

Base Case Assumptions

Having analysed the characteristics of the pool, Ind-Ra establishes its base-case assumptions

via the following three key performance variables, which collectively affect the credit risk in a

transaction:

default rate

recovery rate

prepayment rate

Default Rate

To estimate the base case default rate, Ind-Ra calculated the base case net default level for

vintage data since January 2003. The agency assumed 90+dpd loans as a percentage of initial

principal outstanding as the default proxy. As per the static pools, long-term average of peak

90+dpd default rate for new and used CVs are presently in the range of 4.5% to 5.0% and 6%

to 6.5% respectively.

Also, as per the static pool, newer vintages (2008 onwards) have shown much lower 90+dpd

rates than the long-term average for new CVs. However, for used CVs, certain recent vintages

of 2008 and 2009 observed higher-than-average default rates.

Although some of the 2008-09 static pools of used CV loans have demonstrated higher-than-

average 90+dpd default rates, the performance of 2009-10 static pools have significantly

improved. Also, in the six months ended June 2012, the worse performing 2008-09 vintages

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STFCL CV Trust Feb 2013

May 2013 6

have also moderated to acceptable levels, which indicates that the originator has been able to

stem further deterioration.

To arrive at the net base case default rate, Ind-Ra considers both long-term historical average

of the static pools and the performance of more recent static pools.

New Commercial Vehicles

Figure 4

Figure 5

Used Commercial Vehicles

Figure 6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

90+

dpd

Loan Origination Month

(%)

New CV - Peak 90+dpd by Origination Month

Source: STFCL, Ind-Ra

0.0

2.0

4.0

6.0

8.0

10.0

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

(Months Since Origination)

WA 90+dpd (%) - New CV Static Pool

2003 2004 2005 2006 2007 2008 2009 2010 2011(%)

Source: STFCL, Ind-Ra

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

90+

dpd

Loan Origination Month

(%)

Used CV - Peak 90+dpd by Origination Month

Source: STFCL, Ind-Ra

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STFCL CV Trust Feb 2013

May 2013 7

Figure 7

As the net default rates are net of recoveries, the agency has grossed them up by a suitable

multiplier - based on the historical recovery range and time to recovery - to determine the gross

default rates. The default rates assumed are in the range of 5.0% to 6.0% of the initial POS for

new CVs and 6.5% to 7.0% of the initial POS for used CVs. While determining the base case

default rate, variance in the contribution of any specific asset class in the pool as compared to

the overall portfolio has been considered and duly adjusted.

Loans in the 30 day past due delinquent basket are assumed to have a 10% higher default rate

than non-delinquent loans of a similar profile.

Pool-Specific Adjustments

Ind-Ra has assumed higher base case defaults for those segments of the pool that are riskier

than the portfolio average: lower seasoning, higher delinquency and higher IRRs. Similarly,

appropriate benefit was given to that segment of the pool which has significantly lower default

probability: higher seasoning, lower IRR and lower LTV. Following these adjustments, the

agency assumed a base case gross default rate in the range of 4.5%-5.5%.

Recovery Rate

Ind-Ra has derived the recovery rate from the static pool information. As per the agency‟s

discussions with the originator, most recoveries take the form of roll backs of 90+dpd

customers in the current bucket. The recovery time varies between six to 12 months. Ind-Ra

has assumed a base case recovery rate of 70% to 75%, with a base case recovery time of 12

months.

Prepayment Rate

As per Ind-Ra‟s experience in this asset class, prepayments have historically been low and the

monthly prepayment rate ranges from 0.1% to 1.0%. As per the data shared by the originator,

the monthly prepayment rate increases with loan seasoning. The agency also believes that it is

generally difficult for obligors to refinance their loans due to low competition in CV financing,

the economic slowdown and high prepayment penalties.

However, given the availability of excess interest spread (EIS) in the transaction, Ind-Ra has

assumed a prepayment rate above the average prepayment rate observed to stress the EIS.

The agency has assumed a base case monthly prepayment rate of 0.25% in the first year since

issuance, which increases thereafter.

Yield Compression

The agency reviewed the yield distribution of the assets in the securitised pool and assumed

that 40% of borrowers with the highest interest rate loans will either prepay or default. The

percentage reduction in the pool yield is then deducted from the month-on-month weighted-

average pool yield and applied to the interest collections in Ind-Ra‟s cash flow model.

Liquidity Risk

Ind-Ra observed the peak 0–90 day delinquencies for all static pools to determine the liquidity

0.0

2.0

4.0

6.0

8.0

10.0

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

(Months Since Origination)

WA 90+dpd (%) - Used CV Static Pool

2003 2004 2005 2006 2007 2008 2009 2010 2011(%)

Source: STFCL, Ind-Ra

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STFCL CV Trust Feb 2013

May 2013 8

shortfall the originator may face in case of a temporary delinquency, i.e., less than 90dpd.

Stress Scenarios

After developing base case assumptions for gross defaults, recoveries and prepayment rates,

Ind-Ra stressed these variables for the rating level.

Gross Default Rate Stresses

A stress multiple in the range of 4.0 to 5.5 is applied to the base case default rate in this

transaction. This range of stress multiple is commensurate with a „IND AAA(SO)‟ stress level

for Indian ABS ratings. The stress multiples have been benchmarked against historical peak

default data of Indian structured finance transactions.

Default Timing Stress

The timing of defaults has a significant impact on the performance of a transaction. Ind-Ra

formulates its default curves using historical performance data to observe trends exhibited by

static pools and fully seasoned securitisation transactions. The agency employs various default

timing scenarios depending on the assets tenure to assess the ability of the structure to

withstand various clusters of defaults at three different points in the transaction lifecycle: front,

middle and back, as shown in Figure 8.

Figure 8 Default Timelines Year (%) Front Middle Back

Year 1 60.0 45.0 30.0 Year 2 30.0 45.0 50.0 Year 3 10.0 10.0 20.0

Source: Ind-Ra

Recovery Rate Stresses

Ind-Ra‟s recovery rate stresses recognise the pro-cyclical nature of defaults and recoveries,

with lower recoveries occurring during periods of higher defaults. In ABS transactions backed

by secured loans, Ind-Ra assumes that the asset recovery rate is inversely related to the rating

level. For an „IND AAA(SO)‟ stress level, as in this case, the recovery rate stress assumed is

60% of the base case recovery rate.

Liability Analysis

Ind-Ra uses its cash flow model to test whether the stressed asset cash flows, as well as the

CE and excess interest spread provided in the transaction, are able to cover the following:

the timely interest and principal payments on the rated Series A PTCs

the ultimate principal payments on the rated SLCF

Cash Flow Modelling

Ind-Ra‟s cash flow model considers two sides of the transaction: the assets and the liabilities.

Key assumptions for the asset side of the cash flow model are the base case defaults, timing of

defaults, recoveries, pool yield and prepayments. These assumptions are subject to rating-

specific stresses within the cash flow model.

Stressed asset cash flows are then applied to the liability side of the cash flow model, based on

the priority of payments/waterfall set out in the transaction documentation.

In summary, the stressed asset cash flows are applied to the specified liability waterfall. The

shortfall in each period is calculated to determine whether the CE provided in the transaction

exceeds Ind-Ra‟s break-even CE amount.

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Rating Sensitivity Analysis

This section provides an insight into the model-implied sensitivities of the transaction when

base case assumptions, with respect to one or more variables, are changed, while holding

others equal. The results below should only be considered as one of the many potential

outcomes, given that the transaction is dynamically exposed to multiple risk factors.

The break-even CE for a target rating of „IND AAA(SO)‟ is 11.17% of the initial pool principal.

Since the available CE is 13.2% of the initial pool principal, the PTCs are less sensitive to

changes in the base case assumptions, to the extent that even when both default and recovery

are 20% worse from the base case assumptions, the PTCs would be downgraded by a single

notch only.

Rating Sensitivity to Defaults

The rating migration that will occur if the base case default rate of each loan is increased or

decreased by a relative amount is demonstrated in Figure 9. For example, even if the actual

base case default rate increases (i.e., worsens) by 20%, it will not result in any rating

downgrade of the senior PTCs.

Figure 9 Rating Sensitivity to Default Rate Series A PTC rating

Original rating IND AAA(SO)(exp) Base case increase by 10% IND AAA(SO)(exp) Base case increase by 20% IND AAA(SO)(exp)

Source: Ind-Ra

Rating Sensitivity to Recovery Rates

The rating migration that will occur if the base case recovery rate of each loan is increased or

decreased by a relative amount is demonstrated in Figure 10. For example, even if the base

case recovery rate worsens by 20%, it will not result in any downward migration of the

transaction.

Figure 10 Rating Sensitivity to Recovery Rates Series A PTC rating

Original rating IND AAA(SO)(exp) Base case decrease by 10% IND AAA(SO)(exp) Base case decrease by 20% IND AAA(SO)(exp)

Source: Ind-Ra

Rating Sensitivity to Shifts in Multiple Factors

Figure 11 summarises the rating sensitivity attributed to stressing default rate and recovery rate

assumptions concurrently.

Figure 11 Rating Sensitivity to Multiple Factors (Default Rate and Recovery Rate) Default rate

Recovery rate Base case Base case + 10% Base case + 20%

Base case IND AAA(SO)(exp) IND AAA(SO)(exp) IND AAA(SO)(exp) Base case – 10% IND AAA(SO)(exp) IND AAA(SO)(exp) IND AA+(SO)(exp) Base case – 20% IND AAA(SO)(exp) IND AAA(SO)(exp) IND AA+(SO)(exp)

Source: Ind-Ra

Counterparty Risk

Credit Enhancement Provider

The FLCF is maintained as fixed deposits in the account bank in the name of the FLCF

provider (STFCL) to be held in trust for the benefit of the trustee and with a lien marked to the

The section on rating sensitivities

provides information about the

sensitivity of the rating to model

assumptions. It should not be used as

an indicator of possible future

performance.

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STFCL CV Trust Feb 2013

May 2013 10

trustee.

The SLCF is in the form of an unconditional, irrevocable guarantee provided by Axis Bank Ltd.

If the SLCF provider is downgraded below „IND A‟ publicly or privately by Ind-Ra, it would be

replaced with another eligible SLCF provider within 30 calendar days.

Servicer

The agency recognises the importance of the servicing counterparty role fulfilled by STFCL

(„IND AA‟/„IND A1+‟) in the performance of the underlying loan portfolio.

The transaction documents contain a servicer replacement event, where, if the servicer‟s rating

falls below „IND A1‟ or „IND A‟, the trustee will have an option to replace the existing servicer

with a new servicer within 30 calendar days.

Since the collections from the borrowers remain with the servicer for one month, the transaction

is exposed to commingling risk. The transaction documents contain a rating trigger to mitigate

this commingling risk. As per this trigger, if the servicer‟s rating falls below „IND A1‟ or „IND A‟,

the collections from borrowers are to be deposited in the Collection and Payout Account on a

daily basis.

Account Bank

The originator has provided the FLCF in the form of fixed deposits with account bank (the

designated bank) in the name of the originator, with lien marked to the trustee. If the

designated bank is downgraded below „IND A‟, publicly or privately, by Ind-Ra, the seller will

ensure that the FLCF is placed with another bank whose rating is equivalent to or higher than

„IND A‟/Stable within 30 calendar days.

Performance Analytics

Ind-Ra initiates surveillance once final ratings are assigned to a transaction. The agency has a

dedicated team of analysts who monitor and review Indian ABS transactions rated by Ind-Ra.

Clear and timely reporting is essential to assess the performance of a transaction and form an

accurate credit view.

Ind-Ra expects the report from the servicer to provide the following information with respect to

collections from the pool contracts during the previous month:

Billed amount to the borrowers

Actual collections from borrowers towards this billed amount during the month

The amount and number of contracts of prepayments/advance payments from the borrowers

Ageing analysis of overdues

Debits from and credits to the cash collateral account and credits to the CPA

Actual payments made to the series A PTCs

Any prepayments from borrowers or foreclosures (number of contracts and amounts obtained thereto)

Revised cash flow schedule

Contract details

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STFCL CV Trust Feb 2013

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Appendix A: Origination and Servicing

Originator Profile

STFCL is the flagship non-banking finance company of the Shriram group, and is one of the

largest financiers of CVs in India with more than 525 branches and few franchisees (63% of

which are in western and southern India). The Shriram group has diversified interests,

spreading across financial services industries which include consumer and commercial finance,

financial product distribution, „chit‟ funds (pooled saving schemes among individuals) and life

insurance. The group also promotes and manages several companies in industrial and

manufacturing sectors.

Over the years, STFCL has built up strong disbursement and collection skills in the „small

operator segment of the business. The small operator segment comprises non-fleet operators

who own no more than five vehicles and source their business from fleet operators. STFCL‟s

business focuses on creating knowledge of each type of asset ranging from light commercial

vehicles to heavy commercial vehicles and tippers and also building close relationships with

truckers to enhance business. The gross NPA has been in the range of 1.6%-2.3% and is less

than auto finance companies that are also auto/CV manufacturers. In the used CV segment,

STFCL has a market share of over 20%.

STFCL‟s mainstay business segment is used CVs. With a strong operating history and a limited

number of players in the market, STFCL dominates used CV financing with virtually no

competition. However, in the new vehicle financing business, it is constrained by a lot of

competition from private banks and manufacturing finance companies. In the financing

segment, customers look for a quicker turnaround; hence the opportunity cost attached for

financing companies is high but most rely on the loyalty of customers and expect repeat

business. The used CV segment of five to 15 year-old vehicles is primarily dominated by

STFCL as few financing options are available in the market. However, in the one to seven-

year-old segment, more financing options are available, making the market more competitive.

As pointed out by STFCL, customers who have financed old CVs gradually progress to finance

new CVs.

Origination

STFCL has classified the geographical regions in the following manner: north, east, west, south

and central. STFCL, based on its 30 years of experience, has demarcated regions that have

traditionally higher credit risk for each asset class, to keep defaults in check. In addition to the

branches, the company follows the franchise model where it has a profit sharing and first loss

default guarantee (FLDG) arrangement with the franchisee operator. There are around 500

franchisees spread across India. These franchisees originate on behalf of STFCL by not only

financing other asset classes, such as autos and three wheelers, but also helping STFCL to

penetrate into new customer bases.

STFCL‟s customer base comprises small road transport operators (SRTOs) who have few

supporting documents or sufficient proof of income since they operate in an unorganised

sector. In such a situation, it is imperative to maintain close relationships with customers.

STFCL‟s field executives/product executives are not only responsible for origination but also for

collections for cases referred by them. Each of the field executives/product executives

manages a specific product and handles around 150 accounts. With increasing origination

volumes, the executive count was scaled up to close to 15,000 in September 2012 from 4,952

in FY07. The field executives frequently visit the trucking clusters (which are catchment areas

for contacting truckers) and those locations where the load tendering happens.

The company‟s origination practices therefore primarily focus on the customer profile, the

territory of operation and the product it is financing.

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Credit Appraisal

The company‟s credit appraisal process has two components: fixed policy and variable policy.

The fixed policy applies to all retail loan advances and the variable policy applies to each asset

class (based on the characteristics of the asset class and the expertise STFCL has built in

evaluating such asset class).

Each branch is managed by a credit executive who reports to the credit manager at the

strategic business unit (SBU) level. The product executive sources the business, collects all the

required information as per the company procedure, and forwards the credit application to the

credit executive. In case of any waivers from the prescribed credit policy, the product executive

must seek exemptions from the product manager or above. The company has a credit template

for each asset that it finances, which is suitably modified by the credit risk team regularly based

on updated information.

Credit approval is only given following an applicant‟s interview with the branch manager, and

the sanction period is normally two to three days.

Since the company concentrates on lending to SRTOs, branches are instructed to keep the

total exposure to a single operator to less than INR2.5m. The company follows the policy of not

financing over five vehicles to the same borrower at any point in time. Bulk financing of this kind

involve the decision of the SBU head. Any deviation from the norm is analysed and corrective

action is taken by the SBU head during regular visits to the branches. Each branch manages

around 1,000-1,200 agreements with a team of five to six field officers. If the number of

advances crosses the threshold, a new centre is established to cater the increased demand.

Credit Underwriting

The process starts with the product executive sourcing a loan applicant. The product executive

is an expert in one asset class and therefore has a good understanding of the application and

end-use of the product. For each used vehicle, the product executive prepares a dossier which

includes the following documents and information:

1. Insurance policy of the used vehicle

2. Travel permit of the vehicle

3. Tax challan of the vehicle

4. B-extract of the vehicle: The B-extract gives the complete details of the vehicle such as its past owners, the date of registration and its permit, and its status on tax payments. If the vehicle has been involved in any violation of the laws, the B-extract is withheld by the Regional Transport Office.

5. A physical verification report of the vehicle, which includes the health of its engine, gearbox, chassis and tyres along with a photograph

6. Viability chart, which is a projection of the cash flows that would be generated by the applicant given the contracts he/she has with other fleet operators, the route that he/she normally operates and the freight rates applicable for such routes

7. Valuation of the vehicle: The company maintains valuations for 700 different models. These are updated on a quarterly basis based on new information regarding model performance, new model launches and other business environment variables.

A physical inspection of the vehicle is carried out by a trained field officer and product

executive. The finance is primarily based on the condition of the vehicle and its model type. In

certain specific cases, a valuation report is also sought. The average LTV for the old CV

portfolio is in the range of 60-70% while for new CVs, it is around 90%. For new vehicles,

STFCL only finances the chassis and not the full body.

The details are then sent to the credit executive. The credit executive makes reference checks

on the applicant from the circle of traders he/she normally does business with and also from the

place of residence of the applicant.

The group„s policy is to provide cheaper financing to customers who have a clean track record

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with the company, or those applicants who are guaranteed by an existing customer of the

company (who has a clean track record). In case the customer is new and/or the guarantor is

not an existing customer of the company, the financing is costlier or the loan advanced is lower

as a percentage of the asset value.

If the documents are found to be in order, the applicant is invited for an interview with the

branch manager. The final approval is given by the branch manager only after a face-to-face

meeting with the applicant.

The company gains comfort from the fact it has in-depth information about the region and

cluster of operation.

The loan granted by STFCL has twofold protection; one is by way of a full charge on the

vehicle of the borrower and the other is by way of a guarantee provided by existing STFCL

customers (people who have already taken a loan from STFCL) for the new borrower. In case

of default by the new borrower, STFCL also has a full charge on the guarantor‟s vehicle.

The tenor of new CV loans is generally around four to five years, while that of the old CV loans

is for around three to four years. Typically, the loan ticket size for old CVs ranges from

INR50,000 to INR500,000, whereas for new CVs, the loan ticket size ranges from INR500,000

to INR1,500,000. For the first year, the depreciation for popular models is around 20%, while

for less popular models it is approximated at 30%. For subsequent years, depreciation is

assumed to be 10% for both kinds of vehicles.

Servicing and Collection

The servicing function at STFCL is highly dependent on the close relationship with each

customer. At the time of origination, a payment schedule is furnished to the borrower. The

company sends periodic statements to customers for payment receipt confirmation. While

making site visits to the trucking clusters, the field executives make themselves aware of the

general business environment, the freight rates and the specific customers who may be facing

difficulties in sourcing business, or those whose vehicles may have broken down or been

impounded by the law enforcement authorities. The servicing at STFCL is active in that the

collections team does not always have to depend on a missed payment before they initiate

action.

Loan collection is conducted in essentially two ways: cash and cheques. The collections are

either conducted by field executives on their trips to the clusters or made when customers visit

the branch to pay their monthly instalments branch to pay their monthly instalments. The

compensation structure for the field executives is based on three components: fixed salary,

sales generated and collection performance. One field executive at STFCL is typically given the

responsibility of tracking the collections for around 150 contracts. In case the field executive is

not able to collect dues from a delinquent customer, it is the responsibility of the other officers

at the branch along with the branch manager, to make collections. In case of late payment,

STFCL charges penal interest.

STFCL repossesses vehicles only as the last resort and prefers to bring the customer to the

negotiating table. The overall strategy is to let the vehicle run with the original owner as, in

STFCL‟s view, this improves the probability of the loan getting repaid.

Investor Accounting/Custodial Account Management

The monthly reports are subject to three layers of verification within STFCL. The first layer

check is performed by the accounts team, the second layer check by the finance team and the

third layer check is performed by the internal audit function.

Data Surveillance

Surveillance at STFCL keeps track of 90+ dpd loans in the first year. This is a primary

parameter that is studied every month to understand the quality of origination and servicing of

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the loans on a continual basis. STFCL also monitors its information as regards the performance

of each asset class to update the valuation for each asset class it is financing.

Information Management

STFCL developed a FoxPro-based information management system in the 1990s, wherein

information was collected at individual collection points and aggregated, with a lag. Critical data

points related to client background and history were not part of this system, which continued to

operate until 2006.

Thereafter, STFCL developed an in-house web-based ERP application called UNO that runs

on Microsoft SQL 2008 and .Net 4.0. UNO is designed, developed and managed by Shriram

Value Services and Take Solutions.

The data centre primary site is in Chennai and the secondary disaster recovery site is in

Mumbai. The data at the Chennai Data Centre is replicated to Mumbai Disaster Recovery

Centre on an online basis. The data is also replicated to the Mumbai head-office for data back-

up.

Recruitment and Training

Field officers are recruited locally and are trained for six months before they are given field

responsibility. Their performance is reviewed periodically.

Marketing and Future Strategy

The company does not actively advertise through television or other popular media. Most of the

clients are SRTOs and STFCL intends to build its clientele through a referral marketing

strategy, wherein an existing client, with a strong track record, guarantees the new client. The

product type by asset class, make and model type is well diversified.

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Appendix B: Pool Characteristics

As of Pool Cut-Off Date of 31 December 2012

Figure 12 Seasoning (Months) Pool distribution (%)

<6 2.8 6 to 9 33.0 9 to 12 20.2 12 to 18 27.1 18 and above 16.9

Source: STFCL, Ind-Ra

Figure 13 Original LTV Distribution (%) Pool distribution (%)

<=50.0 5.6 50.1 to 60.0 39.7 60.1 to 70.0 31.0 70.1 to 80.0 9.3 80.1 to 90.0 10.8 90.1 and above 3.5

Source: STFCL, Ind-Ra

Figure 14 Geographical Distribution State Pool (%)

Andhra Pradesh 30.2 Maharashtra 16.0 Karnataka 12.1 Gujarat 7.1 Rajasthan 4.8 TamilNadu 4.6 Madhya Pradesh 4.5 Uttar Pradesh 4.2 Kerala 4.0 Chattisgarh 3.2 Others 9.3

Source: STFCL, Ind-Ra

Figure 15 Distribution by Original Loan Amount Amount Pool (%)

0.0 to 0.2m 0.2 0.2 to 0.3m 2.4 0.3 to 0.4m 10.8 0.4 to 0.5m 23.6 0.5 to 1.0m 52.0 Greater than 1.0m 11.0

Source: STFCL, Ind-Ra

Figure 16 Distribution by Original Tenor Tenor Pool (%)

<=24 months 3.2 24-36 months 6.2 36-48 months 33.0 48-60 months 57.7 >60 months 0.0

Source: STFCL, Ind-Ra

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Figure 17 Distribution by IRR IRR Pool (%)

<=10.0 0.0 10.0-12.0 1.7 12.0-14.0 47.8 14.0-16.0 41.3 16.0-17.75 9.2 >17.75 0.0

Source: STFCL, Ind-Ra

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Appendix C

Figure 18 Deal Comparison

Transaction name STFCL CV Trust

Nov 12 - II STFCL CV Trust

Dec 12 - I Small Operators

Trust 2013 STFCL CV Trust

Feb 2013

Asset class (%) New CV: 18.7%; Used CV: 75.5%; New Pssgr:1.2%; Used Pssgr:4.6%

New CV: 36.2%

Used CV: 60.8%

New Pssgr: 1.3%

Used Pssgr: 1.7%

New CV: 18.2%; Used CV: 75.5%; New Pssgr:3.7%; Used Pssgr:2.7%

New CV: 14.7%

Used CV: 71.9%

New Pssgr: 8.7%

Used Pssgr: 4.7% WA original LTV (%) 62.7 68.9 65.4 65.5 WA original tenor (months)

51.9 49.9 50.2 51.1

WA seasoning (months) 14.0 11.9 12.4 12.3 Pool amortised (%) 28.5 24.4 25.6 24.8 WA IRR (%) 14.1 14.2 14.7 14.2 Loans delinquent (%) 8.9 6.4 7.8 14.4 Transaction structure Par Par Par Par Available CE (% POS) 10.85 10.90 13.5 13.2

Source: Ind-Ra

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