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
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
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
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
Source: India Ratings and Research