Motown liquidity blues: Already hit by slowdown, auto sector is fighting the domino effect of IL&FS crisis too

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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For the Indian automobile sector to revive, lending to the industry must return to pre-IL&FS crisis levels – that’s the word from auto dealers across the country, who, already having been hit by a record slowdown in sales, are now also pressed for funds.

After the IL&FS collapse of September last year, banks and NBFCs have turned cautious towards lending to the auto sector.

While retail disbursements in the auto loan category are down about 20 percent across categories on account of poor demand, dealerships are battling a double whammy of lack of credit availability along with piling inventory, and with it, piling costs.

“Earlier dealers used to enjoy unsecured loan provisions. There was access to a lot of funds. But for the last one year or so, that’s become a lot more stringent. Across the industry we’ve seen a pull-back of funds from the finance industry,” Amar Sheth, owner of the Shaman Group, told CNBC-TV18.

The pain doesn’t end there. Mounting defaults on loans given to the auto sector, and falling real estate prices have meant that banks are asking for unprecedentedly high collateral even for inventory funding, and in the case of old collateral, also reevaluating it on the loans they’ve given.

“NBFCs and Banks are both becoming very risk sensitive. Dealers have been asked to give collateral even for inventory funding. Where collateral is available, they’re reevaluating collateral because real estate prices have gone down. Even with good borrowers, banks don’t want to take any risks by extending any funding limits which are not backed by collateral. This is causing stress on dealerships,” said Nikunj Sanghi, director, Federation of Automobile Dealers’ Association.

Depressed margins have also dissuaded auto dealers from providing substantive discounts on prices to trigger demand – that’s also added to stock pile-up.

Liquidity woes may continue for some time

Bankers that CNBC-TV18 spoke to suggest that the situation is unlikely to improve anytime soon.

“There is some risk aversion to dealership funding in the last six months. That may continue for some time. The wholesale or dealer finance book is down as banks have become more cautious to lending in that space. It’s not necessarily a liquidity problem,” Vyomesh Kapasi, managing director of Kotak Mahindra Prime, the auto loans arm of Kotak Mahindra Bank, told CNBC-TV18.

As inventories piled up to even 60 days in the case of passenger vehicles (PVs) and 2-wheelers, sources told CNBC-TV18 that auto dealers put their foot down and refused to accept more inventory from OEMs, who have run out of factory space to park their unsold stock.

Maruti Suzuki, the largest PV-maker in India, has also extended an additional 15 days to the interest-free credit period it gives to dealers to buy inventory. However, while there has been some moderation in inventory, the pain is far from over.

FADA data shows inventories in the month of May were at 35-40 days for PVs, 55-60 days for 2-wheelers and 45-50 days for CVs. Each unsold car adds to financing woes for auto dealers.

“The problem that happened with the liquidity started after the collapse of IL&FS. The reason for its collapse was very clear — there was a mismatch between borrowing term and lending term for its undertakings. Lending was long term and IL&FS couldn’t repay short term borrowing. Specifically, in auto loans, most good NBFCs don’t have this mismatch, and are therefore not in a similar position as IL&FS.” Nikunj Sandhi told CNBC-TV18 in an interview.

The answer could lie in a special provision for the auto sector when it comes to financing.

“We want that a special package should come in for NBFCs so that liquidity is not a concern in the market. And banks should give auto loans the way they were giving pre-IL&FS collapse. If that happens, demand pickup will happen in the industry,” he concluded.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow