New Delhi: For the struggling Non-Banking Finance Companies (NBFCs), the major lenders to the auto sector, the COVID-19 pandemic was like a bolt from the blue. At the beginning of 2020, they were just recovering from the slow credit off-take and increased distressed assets in the previous quarters of FY20. But the emergence of fresh headwinds created by the pandemic shattered all hopes.
It is to be noted that the NBFC segment finances almost 75%-80% of new cars, 70% of new two-wheelers and 60% of new commercial vehicles in the country.
The impact of the pandemic has been a double-edged sword for the auto sector and NBFCs. Sudden lockdown, massive drop in auto sales and change in buying patterns of customers changed vehicle financing trends drastically in the first half of FY21. Consequently, NBFCs had to slam the brakes on the lending or the credit side of the sector.
With pandemic-induced shutdowns and sluggish economic activities, diminishing consumer confidence auto sales touched historic lows in H1 FY21.
Overall wholesale of vehicles during the first six months of the financial year across categories, including passenger vehicles, two-wheelers and commercial vehicles, saw a decline of 39.6% to 7,087,439 units as against 11,735,937 units in H1 FY20, according to data released by the Society of Indian Automobile Manufacturers (SIAM). Experts say that this was the worst fall the domestic auto industry had ever experienced in more than a decade.
Similarly, total passenger vehicle sales during H1 FY21 declined by 34% to 8,79,966 units compared with 13,33,304 units in the same period year ago.
Two-wheeler sales also saw a dip of 38.28% last year to 59,83,678 units compared with 96,95,638 units in H1 FY20. Likewise, total commercial vehicles saw a dip of 56% to 1,65,160 units during the period under review.
Being the prime financiers, NBFCs bore the brunt of the auto sales crisis. At the same time, the total number of loans disbursed to the auto sector crashed by 63% to INR 28,535.3 crore, compared to INR 77,199.78 crore in the same period in FY20, as per the data released by Finance Industry Development Council (FIDC).
| Sum of Sanctioned Amount (Cr) | ||||||
| Lender Type | FY 2019-2020 Q1 | FY 2020-2021 Q1 | % change | FY 2019-2020 Q2 | FY 2020-2021 Q2 | % change |
| Auto Loan | 638.79 | 98.44 | -84% | 633.67 | 236.59 | 62.6 |
| Auto 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 |
| Construction Equipment Loan | 2551.65 | 1102.6 | -57% | 2244 | 2101.97 | -6.3 |
| Total | 40471.53 | 7421.6 | -82% | 36728.25 | 21113.7 | -42.5 |
Asset quality falls
“Asset quality has suffered across the spectrum for all lenders. The larger NBFCs have now reached a comfortable position but the small and medium NBFCs, the real churners in the system, are still facing challenges due to liquidity constraints,” Raman Aggarwal, chairman, FIDC, said. Though there has been a drop in disbursement, no NBFC has withdrawn from the system, he said.
However, soon after the lockdown, most of the finance companies shifted their focus from lending to collections. Hence there was hardly any loan sanction during the unlock period.
Commercial vehicle loans took the maximum hit within vehicle finance because of curtailed traffic that led to weak earnings for fleet operators. Moreover, all-time low sales of heavy trucks forced some of the financing companies to look for other lending destinations for survival. “Due to erosion of demand few NBFCs in commercial vehicle space diverted to tractor financing where sales continued their healthy run even during lockdown. This helped in bringing the credit growth of financing companies with lead to profitability, ” said Shamsher Dewan, Vice-President, Icra.
The cash factor
Another prime factor that led to a drop in NBFC sanctions within the auto space was the steady rise in an all-cash vehicle purchase.
A Delhi-based dealer who sells hatchbacks and compact sport-utility vehicles worth around INR6 lakh to INR10 lakh said that about half of the vehicles sold during the unlocking phase was entirely on cash. Although the retail was relatively less, it was the concern about safety that triggered auto sales during the unlocking phase.
Auto buyers in India are the most risk-averse when it comes to taking a vehicle loan. Seeing the uncertainty of future income, customers prefer to pay upfront to stay away from any sort of monthly burden.Ashim Sharma, partner, Nomura Research Institute
Passengers largely favoured personal transportation modes such as private cars or two-wheelers over ride-sharing for safety and hygiene. This dealer said that since many consumers live on reduced incomes, they tend to avoid the EMI burden and go for all-cash purchases.
Interestingly, this shift in buying trends was largely for the entry-level cars and lower cc two-wheelers as affordability takes centre stage following the deadly pandemic.
“Auto buyers in India are the most risk-averse when it comes to taking a vehicle loan. Seeing the uncertainty of future income, customers prefer to pay upfront to stay away from any sort of monthly burden,” Ashim Sharma, partner, Nomura Research Institute, said.
The outlook
Auto sales gained momentum in the last three months of 2020. But experts opine that all the chokes are not gone altogether.
According to Sharma, NBFCs have become more cautious and are carefully looking at the customers’ credit profiles before sanctioning the loans. “Due to the pandemic, the income profile of the people seeking loans has become less robust, which might impact the disbursement rate in the coming months. However, improved sentiments will definitely bring some positivity in the sector,” he said.
Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels, experts pointed out.
