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Home / Business / How a shadow banking crisis caused the Indian automotive sector to spin

How a shadow banking crisis caused the Indian automotive sector to spin

MUMBAI (Reuters) – Sudhir Gharpure and his sales team talked on a Saturday near Mumbai at a large dealer of Maruti Suzuki ( MRTI.NS ) Tomorrow – not a single customer was in sight.

FILE PHOTO: A worker sets the wipers of a parked car in a Maruti Suzuki warehouse on the outskirts of the West Indian city of Ahmedabad on September 1, 2011. REUTERS / Amit Dave / File Photo

"There are nearly 15 to 20 bookings every day, but now we are at 3-5 on good days," said Gharpure, the car house's general manager.

Gharpure's experience is not an isolated experience. Car dealerships are being pushed out of business throughout India, and the Indian auto sector is experiencing the biggest slump in nearly two decades. Passenger car sales declined eight consecutive months to June, and in May sales fell by 20.55%, the sharpest decline in 18 years.

Preliminary data suggest that passenger car sales fell by as much as 30 percent in July. The slump in India, along with a concomitant decline in Chinese auto sales, is a hit for automakers facing higher costs due to stricter emission standards and the push to develop electric cars.

Unlike China, where the slump in car sales was largely caused by new emission regulations, India has had a number of factors that have undermined automotive demand.

The ban on high-quality banknotes by Prime Minister Narendra Modi in 2016, higher tax rates under a new tax regime for goods and services, an upsurge of rideshares such as Uber and Ola, as well as a weak rural economy have all played a role.

However, many dealers and automakers agree that India's shadow banks are an aggravated liquidity crisis that has been the biggest single factor in a collapse in car sales. Some fear that this could result in a loss of more than one million jobs.

(Graph: India Passenger Vehicle Sales – tmsnrt.rs/2MmNBWN)

Non-bank finance companies (NBFCs) or shadow banks have dramatically reduced lending following the collapse of one of the largest companies, IL & FS, in recent times 2018

IL & FS, or Infrastructure Leasing & Financial Services Ltd, was a giant in shadow banking and its failures. Detecting fraud has dried up funding for competitors and led to an increase in their borrowing costs.

Non-bank or shadow bank companies generate loans outside traditional lenders, such as through collective investment schemes, broker-dealers or funds that invest in bonds and money markets.

In recent years, NBFCs in India have helped fund nearly 55-60% of new and used commercial vehicles, 30% of passenger cars and almost 65% of the country's two-wheelers, according to ICRA.

To exacerbate the situation, the stress on the car market has also led banks to reduce their exposure to the sector.

"The car does not sell, it's the financing that sells," said R. Vijayaraghavan, a senior marketing consultant at the same Mumbai dealer. "The finance is not selling today, so the cars are not selling."


Over the last 18 months, 286 car dealerships have closed down across India, as rising warehouse costs have made unprofitable business deals the Federation of Automobile Dealers Association (FADA), a lobby group of car dealers.

"The slowdown in the (NBFC) sector has dampened vehicle sales growth," said A.M. Karthik, Head of Financial Sector at ICRA. "Now the automatic slowdown becomes more visible as the liquidity bottleneck continues."

Automobile manufacturers such as Maruti Suzuki ( MRTI.NS ), Tata Motors ( TAMO.NS ) and Mahindra & Mahindra ( MAHM.NS ) feel the heat and either stopped production or temporarily closed the factories to correct inventories.

According to the FADA, car stocks today are between 50 and 60 days, while those of two-wheelers between 80 and 90 days are even higher. For commercial vehicles, the stocks are between 45 and 50 days.

"We ask traders to keep 21 days of inventory, which is nearly half the current level," said Ashish Kale, president of FADA.

At least four dealers of different brands stated that there was little scope to reduce inventories as automakers urged them to buy stocks, despite the fact that there was no demand despite heavy discounts and other offered goods.

While 70-75% of car sales were previously funded internally by NBFC or bank agents sitting at a dealership, dealers have dropped it to about 50% as shoppers struggle to qualify under more stringent credit standards Lender space who are under pressure to support their books.

With many NBFC loans typically being lent to less creditworthy clients, banks are reluctant to close the gap, as they themselves struggle to cope with an existing pile of non-performing loans of approximately $ 150 billion ,

(Graph: Default Rates in Car Loan India – tmsnrt.rs/2MrgfWE)

"The banking sector is certainly one of the factors that has influenced the growth of the industry," said R.C. Bhargava, chairman of Maruti Suzuki, noted that interest rates on car buyers have risen in the last 12 months despite the central bank's interest rate cuts.


With the car industry directly and indirectly employing more than 35 million people, contributing more than 7% to Indian GDP and accounting for 49% of manufacturing GDP, the impact of the auto sector collapse is enormous The government of Prime Minister Narendra Modi is facing a major challenge as she begins her second term.

The entire supply chain, from vehicle manufacturers to component manufacturers, is bleeding in the midst of a break-in.

"I've made my payments over the past 30 years and lenders know me," said Adarsh ​​Gupta, finance director at Autolite (India), a component manufacturer. "But even a delay of two days makes people cry that I'm going to default.

"I want to pay as well, but with the drop in cash flows, I face short-term problems and that's why it's difficult to get more funding." This is the vicious circle we are in right now. "

Nevertheless, the automakers hope for a recovery in the coming months, supported by the holidays from September to December, which traditionally show a rise in consumer spending.

"One can only wish that things improve sooner rather than later. When demand for holidays is gradually declining, sales should gradually improve, "said P.B. Balaji, Group CFO at Tata Motors.

However, analysts are more skeptical and say that the chances of doing so are slim, without making vehicle financing cheaper and easier. With no silver lining in sight, analysts fear that credit losses in the auto sector may increase, forcing banks to further reduce their exposure.

"We see that market prices and sales are falling, which can lead to problems," said a senior official of the Indian Banks & # 39; Association. "We could see a spillover in bad credit for the whole sector, but we'll wait."

Traders expressed hope to bridge the current downturn as India's overall growth story remains intact. But there could be a lot more pain before recovery starts.

"The future will be in multi-brand car dealerships," said marketing consultant Vijayaraghavan. "This is the only way for traders to survive in the future as overheads have to be shared."

Additional coverage by Derek Francis in BANGALORE; and Aftab Ahmed and Aditi Shah in NEW DELHI; Edited by Euan Rocha and Alex Richardson

Our Standards: The Thomson Reuters Trust Principles.

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