Auto loans: Banks wary of financing vehicles as defaults rise

With the Reserve Bank cautioning against bad loans climbing to 20-year highs, banks and other financial institutions are developing cold feet in lending to the automobile sector.

RBI, in a report, said public sector banks’ gross bad loans ratio of 11.3 percent at the end of March may increase to 15.2 percent by March 2021 under the baseline scenario. Private banks may see an increase from 4.2 percent to 7.3 percent.

Automobile dealers, especially of trucks, buses, three-wheelers and two-wheelers, have reported extra layers of scrutiny by banks when availing loans in addition to a lower loan amount.

Ashish Kale, president, Federation of Automobile Dealers Association said, “Banks and NBFCs though flush with high liquidity are still having a cautious approach towards funding auto retail affecting the demand revival especially in segments of CV, 3W and 2W. Vehicle funding percentage has fallen by 10-15 percent in many segments increasing the initial contribution beyond the reach of many customers, despite having the intent to buy.”

This is despite almost every carmaker and two-wheeler manufacturer announcing tie-ups with financiers over the past few months to ease the process of availing finance as well as enticing customers. Though the cost of finance has come down it is not at the same pace as the cuts made by the RBI.

Shashank Srivastava, Head of Marketing & Sales, Maruti Suzuki India said: “Interest rates have come down but not as much as we would have thought they would. The banks are relooking at the credit ratings of the consumer once again. They are reassessing the credit ratings of the consumers."

Auto buyers who put the vehicle for commercial use may be at the bottom of the priority list for banks. Entry-level bikes, three-wheelers (autorickshaw and cargo), cars used as taxis, trucks and buses are the hardest hit.

Though some green shoots are visible in segments like construction, mining and road-building, the overall truck utilisation rate at the national level remains poor. This is forcing banks to provide loans with extra caution to the commercial vehicle sector.

Speaking to Moneycontrol Satyakam Arya, managing director, Daimler India Commercial Vehicles said: “We have seen banks being more cautious than they used to be. They are also not lending to customers availing moratorium right now. We definitely see this as a constraint in demand creation. But the banks are better positioned to take a call.”

Not only do retail consumers need vehicle loans but dealers almost entirely depend on financing to support their purchasing of inventory from the automakers. With rising cases of dealerships being in stress due to the lockdown and being unable to repay the loans in time, banks have become extra cautious in lending to them.