Auto credit companies hope better after suffering pain of Covid in rural India

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After a quarter marked by an increase in delinquencies on auto loans, non-bank financial corporations (NBFCs) and commercial banks hope to do better in the second half of the fiscal year as Indians shop for festivals and the economic activity is improving.

Amid lockdowns and restrictions for Covid-19, automotive NBFCs saw their non-performing assets increase quarter-over-quarter as the second wave of Covid-19 hit the backcountry.

Defaults were greatest in commercial vehicles (CVs), followed by three-wheelers and the entry-level two-wheeler segment. Almost 80 percent of three-wheelers and 45 percent of two-wheelers are purchased on credit in India, the world’s largest market for these vehicles.

Rakesh Sharma, executive director of Bajaj Auto, said owners are unable to afford their EMI (equivalent monthly installment) for three-wheelers. “With everything closed, he does not earn Rs 25,000 per month, which he was before the pandemic, but Rs 15,000, hence the default values. As long as the market does not come back and they can use the three-wheeler for longer, their situation will not improve, ”said Sharma.

The increase in gross NPAs for Bajaj Finance and Mahindra Financial Services (MFSL), two major NBFCs in the automotive segment, rose more than 700 basis points in the three months ending June, quarter on quarter. Three-wheelers represent an important part of the automobile loans of the two companies.

Bajaj Finserv’s auto finance business was hit the hardest. Its NPA on auto loans as of June 30 rose to Rs 2,307 crore from Rs 1,136 crore in March 2021, according to an investor presentation. This is largely due to the loans of two and three wheels.

Banks also hit

The quarter was not easy for the banks either. Rajkiran Rai G, Managing Director and Chief Executive Officer (CEO) of Union Bank, said it had not been a normal quarter (T1FY22). Stress is evident in retail, including auto loans in rural areas, due to health and income issues following the second wave of Covid-19. Many have lost their jobs or suffered severe pay cuts. There has been a substantial restructuring of these loans. “We don’t see loans ending in large-scale defaults. The problem is within the bank’s tolerance,” Rai said.

Prashant Kumar, managing director and CEO of Yes Bank, said the second wave of Covid-19 has hit both rural and urban India. Employment and business in the transport sector suffered in April and May when there was no mobility. Lockdowns and restrictions have weighed on lending in the commercial vehicle category in rural areas.

With the easing of restrictions and the advancement of the monsoon, economic recovery will be much faster in rural areas than in urban areas, which will help reduce the stress burden, Kumar said.

The pain for TVS Credit Services has been less. According to Venkatraman Gopalakrishnan, CEO of the company, GNPA levels at TVS Credit were more or less stable in the first quarter. “In fact, compared to our benchmark group, our GNPA levels are much better contained. The increase in GNPA in FY21 is largely attributed to the impact on our customers’ revenues, due to the pandemic. While things improved in the second half of T1FY 22, our collections have rebounded strongly. With further easing of restrictions, we expect to return to pre-Covid levels, ”he said.

The NPA trend is very “product agnostic,” said Ramesh Iyer, managing director of MFSL. He attributed the trend largely to the blow to rural cash flow due to the pandemic. Almost 90% of MFSL’s loan portfolio is made up of auto loans.

“Most of these vehicles, whether it is a three-wheeled vehicle, a truck, a bus or a taxi, are ‘paid and paid vehicles’. The only segment that performed well is the tractor and agri segment. Also, not to forget, that out of the ninety days of the quarter, barely twenty days were operational. In rural India, due to the state of the health infrastructure, even though people had money, they withheld payments and saved for needs, ”he said.

Iyer said rural demand tends to rebound much faster as owners of these commercial vehicles have to come back into the business to pay off debts.

Rohit Inamdar, senior director of CRISIL Ratings, said that as the second wave wears off, financial institutions should make their business models more robust to build resilience to such disruptions into the normal course of their operations.

“While the focus is on borrower collections, lenders would also benefit from evolving appropriate business models that also incorporate digitization for origination. The rhythm of vaccinations will be an essential element for a complete and unimpeded reopening of economic activity. As the country moves towards pre-pandemic normal in several other aspects, digital collections are expected to continue, and digital montages could also gain momentum, given the low cost of their management and the ease they provide to consumers. borrowers, ”said Inamdar.


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