Commercial banks save transaction cost and risk of recovering the dues from SRTOs by routing the business through NBFCs.

These banks are signing memorandum of understandings (MoUs) with NBFCs with expertise in auto financing loan portfolio. Under the agreement, NBFCs act as an agent for banks and collect interest payments from SRTOs, besides evaluating the loan proposals.

The list of NBFCs entering into such kind of deals include Kotak Mahindra Finance, Apple Finance, Shriram Finance, 20th century Finance and Investment Trust of India.

Since banks do not have the necessary expertise to dealwith SRTOs and the recovery mechanism in place, the NBFCs are stepping in to help banks carrying on the hire-purchase transactions at a fee. NBFCs are entering into such deals as they generate fee-based income. The assets will not be in their books as the financing is done by banks. However, the non-banking companies are also exposed to risks. And in case of default in repayment, the dues are to be cleared by the companies.

As per the agreement, NBFCs evaluate the proposal put forth by individual clients, frame the repayment schedule, act as banks' agent to collect installment payments from individual operators.

"NBFCs make a healthy profit from such deals," said an industry source. This is a fee-based income for which the non-bank entities share the risk with banks. "Even though it is a fee-based activity, the NBFCs are exposed to risk as they take the responsibility in ensuring timely repayment of loan installments. ``There can be a different arrangement where in case of default in payment by SRTO,banks take charge of the assets," said a source from Ashok Leyland Finance.

"Banks are not too keen to finance the SRTOs directly as they do not have the technical expertise," said a source from Kotak Mahindra Finance Ltd.