Bumpy Ride For CV Loans: Lenders Flag Stress But Hopeful Of Recovery

A clutch of lenders have flagged emerging stress in the commercial vehicle or CV financing segment, and an overall economic slowdown.

On Saturday, Kotak Mahindra Bank reported its April-June earnings, which saw a spike in its credit costs on the back of delinquencies in the microfinance institution and retail CV segment. For the June quarter, the bank’s CV and commercial equipment or CE loan book was at Rs 42,972 crore, up 13% on year. The bank's growth was flat quarter on quarter.

"The stress is not necessarily because there is overleveraging. I think it is genuinely to do with movement of goods, payments and particularly the goods segment," Deputy Managing Director Shanti Ekambaram said. This has impacted the operators with less than 10 vehicles across all segments, she added.

While downplaying any systemic risk, AU Small Finance Bank also said that there is stress in the used CV portfolio. The bank’s wheels book is Rs 38,000 crore as of June end, about 32% of its  gross loans.

"The pressure in the used SCV (small commercial vehicle) segment started last year due to delayed capex and heavy rains," AU's Chief Credit Officer Vivek Tripathi said in the post earnings call.

HDB Financial Services also reported a rise in early-stage delinquencies in commercial vehicle loans. Asset financing forms 38% of the NBFC's Rs 1.09 lakh crore loan book, which was up 14% on year in the June quarter.

While the non-bank lender does not operate significantly in the heavy CV space, the weakness that it is witnessing is more prominent in the mid and small vehicle categories. HDB Financial expects the stress to stabilize over the coming months, according to G Ramesh, MD & CEO.

Ramesh also said that there could be several factors affecting CV financing including a sharp rise in vehicle prices in the past few years.

"There are early signs of stress in commercial vehicle financing leading to some inch up in delinquencies in some pockets. However, it still seems a manageable number and shouldn't be a big problem," Jinay Gala, Director at India Ratings and Research.

Mahindra Finance, a key player in CV financing, also highlighted increased competitive pressure in CV financing, especially from public sector banks offering more aggressive rates. As of June end, CV and CE disbursements of the lender were at Rs 2,354 crore, down 12% on year and 36% on quarter.

"We are seeing interim correction in certain geographies where cross-cycle stress has emerged. But this is not a de-prioritization of the business," CEO Raul Rebello said, adding that the used CV segment remains a stronghold for NBFCs.

While these lenders have expressed caution, Shriram Finance, the leader in the space, offered a more optimistic outlook.

Executive Vice Chairman Umesh Revankar said that trucking activity remains healthy and credit cost trends have been stable.

"There’s no distress in the used CV market. Asset values are holding firm, and repossessions have not picked up significantly. Rural demand is strong, and disbursements in Q1 were healthy," he said.

He said that there could be pressure coming in from seasonality because of excess rains in certain location and there could be some disruption and some delay or mismatch in cash flow, but that doesn't end up with the credit cost.

This slowdown has also come as medium and small CV sales recorded decrease of 2.3% on year to 83.638, Revankar said.

For the quarter ended June, commercial vehicles formed 45.23% of the non-bank lender’s loan book. CV loan book stood at Rs 1.23 lakh crore, up over 12% on year and 4% on quarter.

While monsoon and seasonal slowdowns are expected, broader concerns such as flat freight rates and higher vehicle costs have begun to strain smaller transport operators.

"Early monsoons disrupted infrastructure activity, leading to slower CV sales. Everyone expects a pickup by the end of August as festive demand and infrastructure activities resume, Bunty Chawla, Assistant Vice President of BFSI at IDBI Capital said.

Despite the near-term volatility, lenders appear to be adopting a cautious approach towards CV financing, rebalancing portfolios while awaiting a broader economic recovery in the second half of the financial year.