Rising Auto Loan Defaults Mirror Unequal Impact Of Pandemic

Earnings from banks and non-banks for the first quarter of 2021-22, when the second wave of the Covid crisis disrupted economic activity, are reflecting this dichotomy. A few large banks and non-banks, which have reported earnings early in the season, have spoken of stress building in the two-wheeler, three-wheeler, taxi and commercial vehicle segments.

Each of these segments have their own story to tell about the impact the Covid-19 crisis has had on the economy.

The most recent segment to see a rise in defaults is the two-wheeler and three-wheeler loan segment.

Non-bank lender Bajaj Finance Ltd. reported that 19% of its auto loan book was non-performing as of June 30, 2021. A "reasonably disproportionate" part of these defaults are coming from the two-wheeler and three-wheeler financing segments, said Rajeev Jain, managing director at Bajaj Finance during an analyst call after the lender's quarterly results. The three-wheeler business is more severely impacted, he said.

Analysts and other lenders in this segment explain that instances of default are coming from both urban and rural areas this time around. They're fairly widespread across the country.

The chief of a non-bank lender, who spoke on condition of anonymity, said vehicle finance distress is spread across all geographies.

In cities, there is no office crowd using trains, so autorickshaws aren't running. In urban centers, two-wheelers are often used by those working in segments like retail, sales etc. In rural, semi-urban areas, schools are shut so there is no use for three-wheelers.

These are all segments where income levels are impacted, leading to defaults, this person explained.

The pain is widespread, even though some geographies are faring worse than others.

The stress for most vehicle-focused lenders, according to Jignesh Shial, analyst at brokerage firm Emkay Global, is mainly emerging from Maharashtra, especially from Mumbai and Pune, and some other metros and large cities where the impact of Covid-related lockdowns has been severe.

Agreed Jinay Gala, associate director at India Ratings and Research.

The stress in the portfolio is worsened by the nature of lending, the manner in which dues are collected and the collateral.

The issue of high NPAs, said Shial, is also due to lower EMI (equated monthly installments) collections as, typically, for two- and three-wheeler dues are collected door-to-door via collection agencies. If collections do not pick up in the coming quarter, non-performing loans in the segment could inch up even higher, he said. Collections were disrupted due to restrictions imposed on movement amid the second wave of Covid-19 infections.

Also, lenders see little benefit in impounding these vehicles as they can derive limited via secondary market sales.

There is no market for used vehicles right now, especially those where repossession has taken place, said the chief of the non-bank lender cited earlier. As such, a lender will not achieve much via repossession of vehicles.

This demographic, according to this person, is also not as concerned about an impact on credit scores, which often deters retail borrowers from defaulting. Lenders, while recognising that these are mostly honest borrowers who are facing genuine distress, will have just have to give them space, this person said.

The underlying borrower base in this segment is usually prone to asset quality issues as borrowers are from both urban and rural areas, and are largely self-employed, said Gala. “All these factors combined, have led to much higher NPAs in this segment.”

To be sure, some lenders will hurt more than others from the rise in defaults.

For instance, Shial of Emkay points out that Bajaj Finance has a high exposure to the Maharashtra belt due to lending linked to Bajaj Auto sales.

“Even as the first and second Covid wave and subsequent lockdown curbs have affected the two- and three-wheeler financing business for all companies in the segment, the issue has been higher for Bajaj Finance, mainly because of its high exposure in the segment because of Bajaj Auto, along with concentration of its business in Maharashtra where patrial lockdown persists,” said Shial.

Other lenders with relatively large exposure to two-wheeler and three-wheeler loans include Shriram City Union Finance Ltd. and Muthoot Capital Services Ltd.

Of the Rs 1,917 crore worth total loans extended to two-wheeler owners, Muthoot Capital saw 12% becoming overdue for more than 90 days as of March 31, 2021. Earnings for the quarter ended June are yet to be announced.

For Shriram City Union, two-wheeler loans formed about 23%. The lender's exposure to three-wheeler loans is limited, YS Chakravarti, managing director and chief executive at Shriram City Union Finance, told BloombergQuint in a written reply. "We expect asset quality in both two-wheeler and three-wheeler loan books to be either steady over last year or even show a marginal improvement in first half of fiscal 2022,” he said.

In the case of large banks, the pain often does not reflect in the headline numbers as the performance of other portfolios, even within the retail loan segment, will balance out weakness in any one segment.

Still, most lenders will see a spike in risk in this business.

“Since two- and three-wheeler business is a high-risk, high-return kind of a business— a 250-500 basis point spike was expected due to the second wave of the pandemic. Traditionally, the gross NPA-level in the segment usually remains at 8-10% in any given situation,” he said.

Data for bad loans across individual segments within the auto loan category is not available for the industry as a whole.

Alongside higher defaults in the two-wheeler and three-wheeler segments, asset quality weakness has emerged in other parts of the auto loan portfolio.

For instance, BloombergQuint earlier reported that the taxi segment had seen a jump in stress due to the pandemic. Bad loans in this segment, which is a relatively small part of loan portfolios, could be close to 20%, Saloni Narayan, deputy managing director for retail business at State Bank of India, had said.

Commercial vehicle loans is another portfolio facing pain. A combination of pandemic-related business disruption and higher fuel prices have led to strain being felt by operators, BloombergQuint reported.

In contrast, the passenger car segment for personal use remains stable.

"While the personal car segment hasn't been impacted much, four-wheelers used for business purposes, tourism, and even cab aggregators have suffered a blow to their income during the pandemic. To that extent, passenger car loans have seen NPAs shoring up, but that's dependent on the type of borrower base each lender has,” said Gala.