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Covid-19 Lockdown: Impact on auto finance sector

R Basil

Business Growth

Q. What is the growth outlook for commercial vehicles/auto sales and financing for FY21 factoring in the COVID-19 pandemic impact on the economy?

A: Growth of commercial vehicles would primarily depend on the gap between freight demand and current freight capacity. Current fleet utilization levels are at 70%, we expect it to move to about 85% level in a few weeks and perhaps stabilize at 85%-90% for rest of the year. Some sectors like, mining, coal, construction, agriculture etc are expected to perform better than other segments. Commercial vehicles market is going to degrow this year. The high impact will be seen on long haul segment. Basis the lost sales in Q1 and subdued trend, retail commercial vehicle sales is expected to degrow 25-30% for FY21. Passenger vehicle sales is expected to remain flat. Organized used vehicle segment may not be impacted much..

Q. Which of the sub-segments will drive the credit demand in the commercial vehicles/auto finance space?

A: Used commercial vehicle should be the sector driving demand. In new vehicles, application around mining, construction and agriculture goods transportation should perform better.

Q: Do you expect higher traction in the used commercial vehicles/car financing market over the medium term?

A: Yes

Asset Quality

Q: Given the slowdown in the economy due to COVID-19, what is your expectation on the impact on asset quality of commercial vehicles/auto financiers over the near term?

A: There might be deterioration in the asset quality for a few months immediately after the end of moratorium. Subsequently, it might stabilize and even pull back due to improving fleet utilization and also due to availability of various options to address the working capital gap of the transporters. Options may include, emergency working capital loans, other standard working capital loan products offered by financiers and if required the MSME restructuring option is also available to address the cash flow issues of almost 80% of the customers.

Q: Which product segments will witness most deterioration in asset quality?

A: Small operators in Medium & Heavy Commercial Vehicle segment would be most vulnerable especially if the deployment is in the application which is expected to be impacted severely like — passenger transportation, car carriers, consumer durables, sand & stone transportation, cement, steel etc..

Earnings

Q. Will vehicle financiers witness shrinkage in interest margins due to the interest rate cut by RBI and increasing competition from banks?

A: Good rated NBFCs and NBFCs with strong parentage will not be impacted, they will rather benefit.

Q. Your assessment of the expected increase in credit costs for the commercial vehicles/auto financers in FY21 and impact on return on assets?

A: Credit cost to go up by 30-80 basis points annualised. To some extent this should be compensated by increase in margin and cost cutting measures.

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