Tata Capital’s recent merger with Tata Motors Finance Ltd (TMFL) is one of the most significant moves in the Indian non-bank financial company (NBFC) sector in recent years. Approved by the National Company Law Tribunal (NCLT) in May 2025, this deal aims to simplify operations, achieve scale, and capture synergies in vehicle financing.

But the merger comes with its challenges, notably higher credit costs and quality issues from TMFL’s loan book. To address these, Tata Capital is recalibrating its vehicle finance strategy, especially by raising the share of used-vehicle lending.

This article explores:

Key metrics of the combined business: loan book, credit costs, asset quality
The rationale behind increasing used-vehicle finance
Other strategic moves (multi-OEM strategy, funding, risk control)
What this means for Tata Capital’s IPO and wider NBFC sector
Likely outcomes and risks

Overview: Merger, Loan Book & Credit Costs

Merger & Regulatory Approvals

The boards of Tata Capital, Tata Motors Finance, and Tata Motors approved the merger through an NCLT scheme of arrangement in June 2024. The Competition Commission of India (CCI) approved the merger in September 2024. After several formalities, the merger became effective on 8 May 2025.

Through this, Tata Capital absorbed all assets, liabilities, operations of TMFL. Tata Motors ends up with a stake in the merged entity ( 4.7%).

Scale of Loan Book & Profitability

Before the merger, Tata Capital (standalone) had a loan book of ~ ₹1.98 lakh crore as of FY25, while TMFL’s book was ₹30,227.2 crore.

Total income for the merged Tata Capital in FY25 rose to approx. ₹2.83 lakh crore, up to 56% YoY. Net profit rose to 16.3%.

Credit Cost, NPAs & Asset Quality

A key challenge inherited from TMFL is higher credit cost (provisions + write-offs per asset base). Post-merger, Tata Capital’s credit cost ratio jumped from 0.4% in FY24 to 1.4% in FY25. In absolute terms, that translates to a rise from ₹592 crore to ₹2,827 crore.

Gross stage-three loans (i.e. > 90 days overdue) for Tata Capital alone stood at 1.5% FY25; including TMFL’s book, this worsened to 1.9%. For comparison, Bajaj Finance was 1.0%, L&T Finance 3.3%.

Why Increase Used-Vehicle Finance? Tables of Key Indicators?

Before jumping into strategic moves, here’s a table summarizing critical metrics to see where the merger has pushed credit costs and how used-vehicle finance is expected to help.

Table 1: Key Metrics Pre- and Post-Merger, and Used-Vehicle Loan Target

Metric	Pre-Merger Tata Capital (FY24)	Post-Merger Consolidated (FY25)	Target for Used-Vehicle Loans
Credit cost ratio	0.4%	1.4%	Increase used-vehicle share to 50% from ~ 30%
Gross loan book	₹1.98 lakh crore (excluding TMFL)	Combined ~ ₹2.26 lakh crore (includes TMFL)	—
Gross stage-three (90+ days) loans	1.5% (Tata Capital alone)	1.9% (including TMFL)	Improve asset quality
Used-vehicle financing share (current)	30%	Still 30% in overall book (post-merger)	50% target

Notes: Figures for used-vehicle share are approximate from disclosed data; credit cost ratio is after accounting for provisions and write-offs.

Table 2: Comparison with Peer NBFCs – Gross Stage-Three Loans & Credit Cost

NBFC	Gross Stage-Three Loans (90+ days overdue) FY25	Credit Cost Ratio FY25
Tata Capital (post-merger)	1.9%	1.4%
Bajaj Finance	1.0%	2.2%
L&T Finance	3.3%	2.5%

Interpretation of the Tables

The merger substantially increased Tata Capital’s credit cost ratio (from ~ 0.4% to ~ 1.4%), driven largely by TMFL’s lower asset quality.
Gross stage-three loans worsened when TMFL’s portfolio is included, though still better than some peers in certain respects.
Used-vehicle financing is being boosted from ~ 30% to an aspirational 50% share in the vehicle finance book to help improve yields, reduce loan to value (LTV), and lower risk.

Thus, the shift toward used-vehicle loans is not just tactical but central to stabilizing the merged entity’s financial health over the next 24-30 months.

Strategic Shifts Beyond Used-Vehicle Loans

The move to increase used-vehicle loans is part of a broader strategic reset. Other levers include:

1. Multi-OEM & Portfolio Mix Optimisation

Before the merger, TMFL was more focused on Tata vehicle financing. Post-merger, Tata Capital seeks to adopt a multi-OEM strategy (financing different manufacturers) to spread risk and tap broader demand.

Also, increasing exposure to small and light commercial vehicles (L&SCVs) is part of the mix, besides used cars and transporters. This mix can potentially yield better margins, especially if used vehicles have lower LTVs.

2. Funding & Borrowing Cost Improvements

One challenge TMFL had was higher cost of borrowing (higher risk perception, narrower funding sources). Tata Capital can potentially bring down funding costs thanks to its stronger credit rating, wider liability base, and scale.

3. Risk Controls, Collections & Efficiency

Strengthening collections and recovery practices for vehicle finance.
Using analytics, digitisation to manage delinquencies better.
Consolidation of branch networks post-merger (some overlap between Tata Capital’s and TMFL’s branches) to reduce cost-to-income ratio.

4. Regulatory & Listing Imperatives

Tata Capital is an “upper-layer” NBFC under RBI’s scale-based regulatory framework. Such entities are required to list. The IPO of Tata Capital is seen as compulsory under that requirement. The merged entity has filed revised Draft Red Herring Prospectus (DRHP) with SEBI reflecting the post-merger structure.

Funds raised via IPO/fresh issue + rights issue are in part meant to build capital adequacy, meet regulatory norms, absorb incremental credit costs, and provide buffer for growth.

Implications for the IPO & Investor Sentiment

IPO-bound Tata Capital is looking to raise ~$2 billion (≈ ₹17,000-₹18,000 crore) via the public listing. The IPO includes a mix of fresh issue & offer for sale (OFS).

Investors will closely watch how quickly the used-vehicle finance strategy can reduce credit cost and improve asset quality. Comparisons with peers (Bajaj Finance, L&T Finance) will matter. If asset quality remains weak, or growth in new vehicles financing remains too large, the merged entity could suffer margin pressure.

Also, valuation expectations are being reset: rights issues have been priced well below unlisted market valuations. For example, a rights issue in July 2025 was priced at ~ Rs 343 per share, versus ~ Rs 945 in the unlisted grey market. This suggests conservative investor expectations, possibly reflecting concern over TMFL’s legacy issues.

Potential Risks & Challenges

While the strategy has merit, there are risks:

Used-vehicle loans tend to have their own set of challenges: ensuring reliable valuation of collateral, higher maintenance of repossession / remarketing operations, and risk of rapid depreciation.
Competition: Large banks can still offer lower rates for new-vehicle finance (due to cheaper deposits, lower cost of funds), making new vehicles a tough business for NBFCs.
Macroeconomic stress: Fuel price volatility, regulatory changes, inflation can affect repayment capacity, especially in commercial vehicle segments.
Credit cost drag: Even with used-vehicle strategy, improving the credit cost ratio and gross stage-three loans will take time. The article suggests 24-30 months for visible improvement.
Execution risk: Integrating two large businesses (TMFL + Tata Capital), culture, systems, branch overlap, technology, may lead to inefficiencies if not managed well.

What This Means for the NBFC Sector & Auto Finance?

The Tata Capital-TMFL merger is likely to set benchmarks for how NBFCs in vehicle finance respond to scaling pressures and regulatory scrutiny. Some broader implications:

A push toward asset quality over aggressive growth, particularly borrowing costs and delinquency control.
Used vehicle financing may become more mainstream among NBFCs, as it offers risk diversification and better LTV dynamics.
Regulatory expectations for large NBFCs will continue tightening, more transparency, stronger risk management, capital adequacy.
Pricing of IPOs and pre-IPO valuation (including rights issues) may factor in credit risks more explicitly.

Conclusion

The merger of Tata Motors Finance into Tata Capital marks a pivotal moment. While the scale, reach, and potential synergies are large, the inherited credit issues mean Tata Capital must walk a fine line — balancing growth with risk control. Raising the share of used-vehicle financing, optimizing portfolio mix, tapping better funding, and improving collections are all steps in the correct direction.

Today’s metrics show a deterioration in credit cost and asset quality relative to Tata Capital’s pre-merger levels. But with the changes now underway, management expects improvement over the next 24-30 months. For the IPO to be viewed favorably, the market will demand evidence of this turnaround. If successful, Tata Capital could emerge as a stronger, more resilient player in vehicle and auto finance in India, possibly setting the tone for other NBFCs. Still, execution risk, competitive pressures, and macro factors will test this transition.

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