Mumbai, India
With borrowers’ cash and fleet utilisation falling due to the second covid wave, there will be a material impact on vehicle financers’ asset quality, according to a report by India Ratings and Research (Ind-Ra) report. Borrowers are struggling with a reduction in capacity utilisation and rising operating costs due to rising fuel costs, which will decrease their ability to service debt.
The industry has gone through numerous challenges ranging from goods and services tax rollout, demonetisation, and increased system capacity through the revision in axle norms during the ongoing covid waves.
Jinay Gala, Associate Director, India Ratings and Research, said that the impact of the first covid wave was cushioned with multiple measures such as regulatory moratorium, loan restructuring, additional funding through the emergency credit line guarantee scheme besides a sharp pent-up demand recovery which raised optimism about faster-than-expected normalisation.
There could be a different outcome during the second wave because of the widescale effect, which includes rural areas and pent-up demand being already absorbed. According to Ind-Ra estimates, the collection efficacy for May’s first fortnight could decrease by 5% to 7%, in addition to a similar decline in April over March 2021.
With increasing operating costs because of fuel inflation and reduced savings of borrowers, the extra capacity had its countered effect on market freight rates or freight contract renewals, affecting the cash flows of borrowers.
Early indicators of demand such as diesel consumption, E-way bill are exhibiting signs of moderation and asset inflation (increasing raw material prices such as cement and steel) would affect demand offtake and thereby load availability. Therefore, both rising operation cost and demand would moderate the cash flow of borrowers in FY22.
The collection efficacy of auto lenders would also be impacted by restricted mobility as the second wave has spread across all geographical areas, according to Ind-Ra. Therefore, Ind-Ra does not feel positive about commercial vehicle finances as an asset class.
Trends are emerging about increasing vehicle financer’s loan tenures to decrease borrower’s service burden, which could lead to an increase in loss, given the defaults for collaterals.
In the medium-term, lenders would be impacted because of restricted mobility and moderating cash flows of borrowers. Collections have become tough because of a rise in infected cases and would affect asset quality in 1HFY22. However, Ind-Ra, noted that lenders have shored their liquidity and capital buffers to work through the challenging times.
Source: India Ratings and Research
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