Rate cut, liquidity alone won’t help reverse falling car sales
The recent steps by the government and the RBI to ease liquidity might help the auto industry run its course.
The recent steps by the government and the RBI to ease liquidity might help the auto industry run its course. But there is a big ‘if ’ that could play a spoiler, as you will see. First, let’s take a look at what the central bank and the government have done to boost credit supply:
The RBI cut repo rate by 35 basis points (bps) in its last policy review. This has triggered a trickle-down effect with public-sector banks (PSBs) slashing lending rates for vehicle loans by 10bps-15bps.
Finance minister Nirmala Sitharaman in her Budget announced an Rs 70,000 crore re-capitalisation for PSBs. This will give banks the additional heft to lend.
The government has also provided a one-time credit guarantee to PSBs for purchase of pooled assets to the tune of Rs 1lakh crore from NBFCs. The non-banking financial entities will be allowed to sell up to 20 per cent of their standard assets as on March 31, 2019 subject to a cap of Rs 5,000 crore at fair value.
Bankers ET Prime spoke with were hesitant to reveal how they would leverage this additional capital in the system and bolster loan-value ratios unless they receive the funds. But with the transfer of RBI’s surplus reserves of Rs 1.76 lakh crore to the government, banks are likely to get fresh capital soon. The vehicle-financing market will be able to step on the gas if extra liquidity flows in before festivities begin.
A member from the Federation of Automobile Dealers Association (FADA) says the government’s guarantee to banks for buying the asset books of NBFCs will create more headroom for the shadow banks to lend for vehicle purchases. PSBs will also benefit by generating increased interest incomes on their expanded loan portfolios after buying the asset books of NBFCs.
But two questions need pointed answers: At the end, will vehicle financing get a boost?
Will financial institutions still remain risk averse, considering the auto sector is deep in the woods?
ET Prime did some number crunching and spoke with bankers, auto-industry insiders, and experts to find the answers.
Why NBFCs went into the slow lane
After the IL&FS meltdown last September, NBFC lending to the auto sector was adversely impacted. As of December 2018, auto loans accounted for 29.8 per cent of NBFCs’ assets with a delinquency of 4.60 per cent compared with the industry average of 2.9 per cent.
NBFCs have in recent years helped fund nearly 55 per cent-60 per cent of commercial vehicles, both new and used. About 30 per cent of passenger cars, 60 per cent of auto equipment, and nearly 65 per cent of the two-wheelers were credit outstanding, according to AM Karthik, vice-president and sector head - financial sector ratings, Icra. “Banks and NBFCs contribute equally to overall retail-vehicle financing, estimated at Rs 9 lakh crore-Rs 10 lakh crore. Credit outstanding against the passenger vehicle segment is about Rs 4 lakh crore.”
NBFCs have been more active in utility vehicles, commercial vehicles, and used cars. Many passenger vehicles and twowheelers have captive financiers. Large players such as Bajaj Finance and Mahindra Finance not only cater to their own clients but also to customers of other brands.
“NBFCs have had problems of funding and that is why they have constraints in disbursals, which have slowed down. Besides, there is risk aversion. I don’t expect a significant upswing in disbursals during the festive season in vehicle loans. The main push will likely be coming from banks,” says Lalitabh R Shrivastawa, deputy vice-president, fundamental research, Sharekhan. “One can expect improved pricing in terms of processing fee or higher loan quantum from banks.”
NBFCs were very aggressive in lending to the rural sector and semi-urban areas, especially to farmers, daily wagers, and small servicemen before the IL&FS crisis, contributing 30 per cent-40 per cent to vehicle finance, says Vinkesh Gulati, vice-president of FADA. After the IL&FS crisis, liquidity dried up and NBFCs share dropped to 15 per cent-18 per cent. The loan-to-value ratio has also dropped to 60 per cent-65 per cent from 80 per cent- 85 per cent. Banks used to provide about 85 per cent of the vehicle loans previously.
Tighter lending norms over the last few years have kept vehicle loans on a tight leash. Since the entire outstanding amount has to be entered as loss in the balance sheet if a borrower delays repayment or errs on interest payment, it impacted NBFCs’ rating apart from raising their borrowing cost.
The default time limit too has been reduced from 120 days to 90 days, making NBFCs more cautious. Even in rural areas, farmers have to give income proofs and landholding papers to access loans for vehicles used for commercial purposes.
Shriram Transport Finance, an NBFC which leads in used-vehicle financing, gives new vehicle loans accounting for 15 per cent of its total loan portfolio of Rs 105,000 crore. Of this, Rs 95,000 crore is lent for commercial vehicles, passenger vehicles, and tractors. Commercial vehicles alone make for 70 per cent of the total auto portfolio, followed by passenger vehicles at 25 per cent and tractors at 5 per cent.
Umesh Revankar, managing director and CEO, Shriram Transport Finance, says during the festive season vehicle loans typically rise 20 per cent in both new and used-vehicle segments. But this time, he expects demand for vehicle loans to average 10 per cent growth in both the segments.
Repo rate cuts are usually passed to NBFCs by banks who in turn pass it on to the consumer, he says. “Right now, repo rate cut has not been passed from banks to NBFCs.” Shriram Transport Finance has increased its lending rate by 60 bps since last October, with the current lending rate averaging 17 per cent for new and used vehicles, with rates as high as 21 per cent for the latter.
“We expect PSBs to start lending to NBFCs as both the RBI and the government are coming out with more comfortable and encouraging schemes for banks to lend,” Revankar says.
Shriram Transport Finance says it is looking at disbursing Rs 4,000 crore during the festive month. Monthly disbursements range from Rs 3,000 crore to Rs 4,000 crore. This is down by 10 per cent for the NBFC since last October.
A Bank of India official, who didn’t wish to be named, says private-sector banks and NBFCs are feeling the pinch because of lower offtake from auto dealers. PSBs are not that affected as the potential loss of financing vehicles rising from reduced rates will be offset by new business. For vehicle loans, most of the banks business is with families and salaried employees. He says this class of borrowers prefers to buy a smaller vehicle with a smaller ticket size of Rs 3 lakh-Rs 4 lakh where EMIs are not hard to repay. For Bank of India, while the average ticket size for the vehicle purchase has shrunk the number of vehicle loans has risen and the bank expects to carry this forward into the festive season.
Banks pushing the envelope
To be fair, the banks have reduced rates on auto loans by almost 35 bps since December 2018. The steepest decline has been in August, by 25 bps vis-à-vis July. Understandably, this is no coincidence since the slowdown became more pronounced during the first quarter of FY20.
Responding to the slow credit offtake as well as RBI’s rate cuts, SBI has cut lending rates by 25 bps for auto loans for its customers. The state-owned lender has also increased the total loan-to-value ratio for salaried customers and is giving an option to avail up to 90 per cent of the on-road price of the car, says Shrivastawa of Sharekhan.
This might help the bank improve its sagging auto-loan portfolio. The share of auto loans in total retail advances of banks has declined by a significant 60 bps from December 2018 to June 2019 (9.49 per cent to 8.88 per cent). NBFC disbursements have also weakened and have been more stable on the retail-assets side. Bank credit growth has slowed down for the fiscal ending March 2019 from the previous year. While non-food credit growth was pegged at 11 per cent, vehicle loans grew by 5 per cent.
The relative share of PSBs in auto loans has remained almost constant at 30 per cent as is NBFCs share, while the share of privatesector banks has remained around 38 per cent with total vehicle dispersals pegged at Rs 408,900 crore from all sources, according to RBI data.
Bank finance is more prevalent in urban cities, especially among the salaried class and people with secure incomes since a lot of documentation is involved. In the last 12-18 months, credit has become tighter as PSBs ask for past records, income proof, Cibil records, and credit history proof, etc. Earlier, loan defaults were ignored if they were later paid off by family. But now borrowers with clean records are only entertained. Other loan seekers have to turn to private-sector banks or NBFCs.
But banks have cut the funding limit. If 90 per cent of the vehicle cost was earlier financed, now 80 per cent gets funded. “However, for a good borrower, there is no shortage of money,” says an industry expert.
Banks are, however, often accused of not passing on the rate-cut benefit to retail customers.
The banker quoted earlier maintains that even if RBI lowers the repo rate, banks are unable to pass them on because repo constitutes just 2 per cent of the total liabilities for banks. So even if RBI cuts rates by 25 bps, the cost savings for a bank are too little. On the other hand, if loan rates are cut, the impact is on a much bigger portfolio and the net effect will be a loss in margins for banks. Low realisation of interest due to asset-quality issues causes downward rigidity to lending rates.
PSBs and private banks have lost market share in overall retail loans during FY19.
The decline was a sharp 12 per cent for PSBs. However, despite the liquidity crunch post the IL&FS crisis, NBFCs have increased their share in incremental retail loans disbursed during FY19 by 10 per cent, which means almost equivalent to what the PSBs lost during this period. This may in turn be due to two major reasons: NBFCs taking loans from banks to fund credit as mutual funds, commercial papers, etc. stopped lending to them Risk aversion by banks led to NBFCs taking up the space.
If NBFCs have indeed taken up the slack from PSBs and disbursed loans, what explains the steep fall in automobile salesRs A former executive director of Corporation Bank says, “It could only be due to a slowdown and indicates that people who are averse to debt burden are slowing down on purchases. It could also be due to increased margin requirements by banks.” Moreover, the new generation prefers rental car services to owning a vehicle. It is worth noting that financial savings of households are seeing a decline, resulting in lower capacity to pay.
The bottom line
In absolute terms, vehicle loans have stayed flat or slowed in certain months between December 2018 and June 2019 as a sluggish economy and rising cost of ownership saw consumers postponing car purchases. But with the finance ministry stepping in to ease liquidity, consumer sentiment is expected to improve.
Shashank Srivastava, executive director, marketing and sales at Maruti Suzuki India, says India’s largest carmaker is promoting exchange of old cars for new. Banks have various loan schemes for vehicle purchases. Normally, 10 per cent of the ex-showroom price is the down payment, he adds.
A top executive heading a busy branch of Canara Bank tells ET Prime, “We have reduced interest rates on auto loans and are encouraging disbursals to this sector. We have waived off processing charges as well since the festive season will commence shortly. However, we are not seeing enough demand.”
The needle won’t move unless car buyers walk into the showrooms.