New Delhi: For struggling Non-Banking Financial Companies (NBFCs), major automotive lenders, the COVID-19 pandemic has been like a thunderbolt. At the start of 2020, they were just recovering from slow credit drawdowns and rising distressed assets in previous quarters of FY20. But the emergence of new headwinds created by the pandemic has shattered all hopes.
It should be noted that the NBFC segment finances nearly 75 to 80% of new cars, 70% of new two-wheelers and 60% of new utility vehicles in the country.
The impact of the pandemic has been a double-edged sword for the automotive sector and NBFCs. The sudden lockdown, massive slump in auto sales and changing customer buying habits drastically changed vehicle financing trends in the first half of FY21. As a result, NBFCs had to tighten the brakes on the lending or credit side of the sector.
With pandemic-induced shutdowns and sluggish economic activity, declining consumer confidence in auto sales hit historic lows in the first half of FY21.
Overall wholesale of vehicles in the first six months of the financial year across all categories, including passenger vehicles, two-wheelers and commercial vehicles, saw a 39.6% drop to 7,087 439 units compared to 11,735,937 units in the first half of FY20, according to data released by the Society of Indian Automobile Manufacturers (SIAM). Experts say it is the worst fall the domestic auto industry has seen in more than a decade.
Similarly, total passenger vehicle sales in the first half of FY21 decreased 34% to 8,79,966 units from 13,33,304 units in the same period last year.
Sales of two-wheelers also saw a 38.28% drop last year to 59,83,678 units from 96,95,638 units in the first half of fiscal 2020. Similarly, the total number of commercial vehicles saw a drop of 56% to 1,65,160 units during the period under review.
As major financiers, NBFCs bore the brunt of the auto sales slump. Meanwhile, the total number of loans disbursed to the automotive sector fell by 63% to INR 28,535.3 crore from INR 77,199.78 crore in the same period of FY20, according to data. published by the Finance Industry Development Council (FIDC).
|Sum of sanctioned amount (Cr)|
|Type of lender||Fiscal year 2019-2020 Q1||Fiscal year 2020-2021 Q1||% change||FISCAL YEAR 2019-2020 Q2||FISCAL YEAR 2020-2021 Q2||% change|
|Car loan (personal)||15214.02||3262.05||-79%||14005.42||8808.82||-37.9|
|Commercial vehicle loan||22067.07||2958.51||-87%||19845.16||9966.32||-49.7|
|Loan of construction equipment||2551.65||1102.6||-57%||2244||2101.97||-6.3|
Asset quality falls
“Asset quality has suffered across the board for all lenders. The larger NBFCs have now reached a comfortable position, but the small and medium NBFCs, the real churners of the system, are still facing challenges due to liquidity constraints,” said FIDC Chairman Raman Aggarwal. Although there has been a drop in disbursements, no NBFC has opted out of the system, he said.
However, soon after the lockdown, most financial firms shifted their focus from lending to collections. Therefore, there was hardly any loan sanction during the unlocking period.
Commercial vehicle loans have been the hardest hit in vehicle financing due to reduced traffic which has resulted in low revenues for fleet operators. Additionally, historically weak heavy truck sales have forced some of the finance companies to look to other lending destinations to survive. “Due to eroding demand, few NBFCs in the commercial vehicle space have shifted into tractor financing where sales have continued to boom even during the lockdown. This has helped drive finance company credit growth with profitability,” said Shamsher Dewan, Vice President, Icra.
The Cash Factor
Another main factor that led to lower NBFC sanctions in the automotive space has been the steady increase in the purchase of a vehicle with cash.
A Delhi-based dealer that sells sedans and compact sport utility vehicles worth around INR 6 lakh to INR 10 lakh said about half of the vehicles sold during the unlock phase were all cash. Although retail was relatively less, it was security concerns that drove auto sales during the unlock phase.
Auto buyers in India are the most risk averse when it comes to taking out a car loan. Seeing the uncertainty of future income, customers prefer to pay in advance to avoid any monthly charges.Ashim Sharma, Partner, Nomura Research Institute
Passengers have largely preferred personal modes of transport such as private cars or two-wheelers to carpooling for safety and hygiene reasons. This retailer said that since many consumers live on reduced incomes, they tend to avoid the burden of EMIs and opt for all-cash purchases.
Interestingly, this shift in buying trends was largely for entry-level cars and sub-cc two-wheelers as affordability takes center stage after the deadly pandemic.
“Auto buyers in India are the most risk averse when it comes to taking out a car loan. Seeing the uncertainty of future income, customers prefer to pay upfront to avoid any monthly charge,” said Ashim Sharma, Nomura Research Institute partner.
Auto sales have picked up steam in the last three months of 2020. But experts say not all bottlenecks have completely disappeared.
According to Sharma, NBFCs have become more cautious and carefully review customer credit profiles before sanctioning loans. “Due to the pandemic, the income profile of people applying for loans has become less robust, which could impact the disbursement rate in the coming months. However, the improved sentiment will definitely bring some positivity to the industry,” he said.
Additionally, any change in borrowers’ payment discipline behavior can affect delinquency levels, the experts pointed out.