Banks, NBFCs Deal Another Blow To India’s Battered Auto Industry

The nascent recovery in auto sales is now under threat.

Maruti Suzuki vehicles stand lined up at the Maruti Suzuki India Ltd. Brand Center in New Delhi. (Photographer: Nishant Sharma/BloombergQuint)
Maruti Suzuki vehicles stand lined up at the Maruti Suzuki India Ltd. Brand Center in New Delhi. (Photographer: Nishant Sharma/BloombergQuint)

One indicator may be worrying for India’s automakers even as sales rebound after April’s complete washout—lenders have turned stricter.

Around 80% of owners, according to an auto dealers' lobby, bought cars, motorcycles and scooters on borrowed money prior to the pandemic. But as economic activity collapsed during the harshest lockdowns in the world, millions are estimated to have either lost jobs or saw their salaries slashed. Lenders don’t find them creditworthy anymore.

There is no liquidity concern but banks and non-bank lenders are cautious because the moratorium on repayment of loans has ended, said Rajesh Menon, director general at the Society of Indian Automobile Manufacturers. “They will be a bit watchful. We will have to wait and watch how the NPAs turn out to be.”

After Prime Minister Narendra Modi shut everything at four hours' notice, businesses laid off staff and reduced salaries to cut costs anticipating a sharp downturn. To cushion borrowers, the central bank allowed a moratorium on loans for six months. Most estimates expect a spike in bad loans—already one of the highest among large economies—as repayments resume this month despite the option to restructure loans.

Having contracted nearly 24% in April-June, the most among major economies, India's GDP is expected to see a painful recovery even as it reopened amid the fastest pace of rise in Covid-19 infections. For the auto industry, that comes when sales were already slowing before the pandemic on higher upfront costs and new emission standards. As financing became tougher, outstanding auto loans contracted 1.3% from March till July, according to the Reserve Bank of India data.

“Finance has been an issue for a while but earlier the perception was that the economy will improve, but now we know the things are tighter and there is uncertainty in terms of sustainability of the income,” Prakash Agarwal, director and head of financial institutions at India Ratings and Research, said over the phone. “So it’s normal for the banks to be cautious.”

Banks earlier financed 80-85% of the on-road pricing of the vehicle, according to Vinkesh Gulati, president of the Federation of Automobile Dealership Association. “It has come to down to 65%-70%.”

Banks Turn Away Two-Wheeler Buyers

Anil Goel, owner of Himgiri dealerships for Hero MotoCorp Ltd., Hyundai and Ashok Leyland Ltd. in the Delhi-National Capital Region, said the stress is more in the two-wheeler segment as lenders are reluctant to finance purchases by buyers living on rent, migrant workers and low-income groups.

About 800 kilometres east in Prayagraj, Uttar Pradesh, Ankit Srivastava, who runs two dealerships of Hero MotoCorp, was already worried about demand. Lack of financing has snuffed out any hope of a revival for him.

Sales tripled year-on-year in June because of pent-up demand as the economy reopened, while July and August have been on a par with last year, he said. While driving volumes hasn’t been easy, stricter financing will kill 25-30% demand, he said.

Lenders only offer loan for 40-50% of the on-road price, down from 70% earlier, he said. “Given the kind of documentation that is now required and questions asked, sometimes even the customer cancels the purchase.”

Maruti Suzuki India Ltd., Hyundai Motor India Pvt. Ltd. and Tata Motors Ltd. declined to comment for this story.

Watch | SIAM’s Rajesh Menon on vehicle financing woes

Dealers Face Capital Crunch

The problem is not just with retail financing. At least six dealers from different parts of the country that BloombergQuint spoke with said they too were finding it difficult to raise funds for buying inventory.

A survey of 19 dealerships by ICRA Ltd. threw up similar findings. Almost 74% of the participants said wholesale funding from banks and non-banking financial companies has tightened, the ratings agency said in its report. 26% said the rejection rate has increased for retail financing.

“Inventory financing has been shrinking,” said Sanjeev Sisodia, group general manager at Unity Hyundai, a dealer for the Korean automaker in Delhi. “If we gave collateral worth Rs 10 crore, we would earlier get Rs 15 crore for inventory,” he said. “Now, the same security fetches Rs 8 crore.”

Watch | VP Ashish Modani on ICRA’s auto dealers survey

‘Turbulent Storm’

Kailash Baheti, chief financial officer at Magma FinCorp, a non-bank lender, said NBFCs are behind 10-15% on collections compared with pre-pandemic levels. That has prompted them to tighten credit risks.

“And as long as you are afraid of the past, you won’t be brave enough to go ahead and underwrite,” he said. If out of 100 leads, the NBFCs were funding 60 in the past, now they may be 20 or 30, he said. “Unless your earlier book behaves well, you will hold back until the correction from the past stabilises.”

According to AM Karthik, vice president and sector head, financial sector ratings, at ICRA Chennai, said banks’ disbursement is at 50-60% of corresponding month pre-pandemic.

In an analyst call, Kotak Mahindra Prime, the vehicle financing unit of the bank, said for the quarter ended June, passenger vehicle operators continued to suffer due to various restrictions on their movements. “Given this scenario, we are cautious on new disbursements and completely focused on managing the existing portfolio,” said Narayan SA, president for commercial banking and retail broking at the bank.

Kotak Mahindra Bank Ltd. and HDFC Bank Ltd. didn’t respond to emailed queries. Bajaj Auto Ltd., which also finances two-wheelers, declined to comment.

Baheti of Magma FinCorp said banks and NBFCs are waiting for post-moratorium collections. Whether a customer opts for restructuring or turns delinquent because of inability to repay has to be seen, he said. “By end of this month, we will have 60-70% clarity and by the end of December everything will be clear.”

Gulati of FADA summed up the situation: “The moratorium was supposed to help tide over a turbulent storm, not give banks a reason to take it in a negative stride.”