Slump In Vehicle Sales Puts Pressure On Auto-Focused Lenders
The continued slowdown in auto sales has pulled down bank lending to this segment, even as non-bank lenders have retreated.
Growth in vehicle loans given out by banks fell to below 5 percent in April and has stayed at close to those levels, shows monthly sectoral data released by the Reserve Bank of India. In July, the latest month for which data is available, vehicle loans given out by banks rose 4.9 percent over a year ago. Last year, the pace of growth was nearly double this.
The slump in auto loans follows a sharp contraction in auto sales, which has persisted for months now. While a slowdown in availability of finance from non-bank lenders was seen as one of key factors behind the slump in auto sales, the weaker demand for cars, two-wheelers and commercial vehicles is now leading to a vicious cycle and impacting loan offtake even for lenders who have the capacity to grant fresh loans.
While banks are still seeing some growth in their outstanding vehicle loan portfolios, non-bank lenders are seeing a contraction.
According to data from the Finance Industry Development Council, an industry association, the quantum of auto loans disbursed by NBFCs, across categories, declined by 17.4 percent to Rs 41,153 crore in the first quarter of FY20 from Rs 49,826 crore in Q1 FY19. Data for outstanding automobile loans of NBFCs was not available.
Banks and NBFCs together, witnessed a growth of 16.4 percent between Q1 FY19 and Q1 FY18 in incremental auto loans. This dipped to just 0.6 percent growth between Q1 FY20 and Q1 FY19, the data shows.
Vicious Cycle Of Demand And Financing
While availability of finance is one issue that has plagued the sector over the past year, the current market conditions suggest that buyers are postponing purchases for reasons other than just availability of financing.
The head of an automobile dealership in Mumbai, speaking on condition of anonymity, said that funding is not an issue as most eligible customers can get loans even today. What is hurting demand is the economic environment coupled with weak stock markets. As a result, there is less demand from non-salaried and self-employed customers.
A second automobile dealer said that many customers think there will be reductions in GST and interest rates in the coming months. They also want to buy the newest models (either BS-VI or EVs), which could be more cost-effective because of tax incentives and other government schemes, the dealer said while also speaking on condition of anonymity.
Venkatraman Gopalakrishnan, chief executive at TVS Credit Services Ltd., said that purchase decisions are being postponed, impacting credit demand.
“There is a slowdown in the auto market and availability of finance is not the sole reason. There is a visible pattern of potential buyers postponing their purchase decisions. Confidence could return slowly after the monsoon but we will have to wait and see,” he said.
The NBFC crisis is only one of the many factors that is impacting the sector, said Arun Agarwal, analyst at Kotak Securities. “If manufacturers anticipate a demand pickup they could push for higher inventories at dealers, but currently there is weak retail demand and pushing dealers to stock more vehicles would impact their business,” Agarwal said.
On Aug. 31, BloombergQuint reported that retail auto sales in August dipped to a 20-month low as buyers stayed away despite heavy discounts.
Commercial Vehicle Financiers Under Pressure?
Among the automobile segments facing the maximum pressure is commercial vehicles.
As a consequence, commercial vehicle loans given out by NBFCs have seen the steepest fall of 38 percent, shows FIDC data. A break-up of vehicle loans by banks provided to different segment is not given out by the RBI.
Umesh Revankar, chief executive officer at Shriram Transport Finance Company Ltd., said this fall is due to weaker demand that followed the government’s new axle load norms released in July 2018, which increased freight capacity of existing commercial vehicles by 15-20 percent. “This has led to less demand for these vehicles by companies as they have additional carrying capacity on their existing fleet of CVs,” he said. “Since demand is not as aggressive as before, so there will be marginal loan growth in these segments over the coming quarters.”
According to Digant Haria, analyst at Antique Stock Broking Ltd., heavy commercial vehicles have witnessed a decline in sales due to pre-buying in FY18 on the back of BS-IV implementation. A slowdown in construction and infrastructure activities has also impacted heavy commercial vehicles, while sales of light or small commercial vehicles have held up better.
Haria, however, said that not all commercial vehicle financiers will be impacted badly. Despite the weak demand, commercial vehicle-focused NBFCs have maintained their asset quality and margins, Haria said in a Aug. 29 report.