Jun 2019 | Experian in the News |

Slack in micro enterprises and small and medium scale businesses leading to loan delinquencies.


The slowdown in the economy has increased delinquencies in the auto and the commercial vehicle loans of NBFCs and banks. The drop in businesses among the micro enterprises, the small and medium scale businesses and individual businesses are leading to the distress in the segments. Rating agency Moody’s had warned last week that delinquencies in both the segments could rise further.


For both commercial vehicles and auto loans, the defaults peaked in December 2018, with credit flow moving to non-metro areas netting customers who may not be creditworthy. Loss of employment is also leading to stress in repayments.


“The auto loans portfolio showed a steady growth in FY19, though there has been a slight uptick in delinquencies in the second half of previous fiscal,” said Sathya Kalyanasundaram, country head and managing director, Experian India.



With all the vehicles required to meet the Bharat Standard Emissions (BS6) norms by April 2020, it is expected that there will be many vehicle purchases in the second half of the current year when people will buy before the prices go up in 2020.


“However, if the slowdown lasts for another six-nine month, then there will be a major issue but now it is within manageable levels,” said a senior official from Shriram Transport Company, the largest financiers operating in the commercial vehicle segment with a market share of 25%. The company has outstanding loans of Rs 75,000 crore in the segment.


The first-time loan customers are part of the problem with credit discipline becoming an issue, leading to defaults and strained cash flows among the small enterprises, thus making it difficult to repay.


“Moderation in overall demand and stretched cash flow position of small businesses and SMEs would have a cascading impact on the vehicle operators; this would impact the segment’s asset quality,” said AM Karthik, vice president, sector head, financial ratings, ICRA.



NBFCs finance to the commercial vehicle segment is about Rs 2 lakh crore while the banks’ outstanding finance for the purchase of CVs is about Rs 1.5 lakh crore. Further, banks finance to the auto loan segment is about Rs 3 lakh crore while in the case of NBFCs, it accounts for the remaining Rs 1.50 lakh crore.


“Over the last three years, retail lending, including auto loans, has seen expansion in non-metro locations to the new-to-credit (NTC) segment. Nearly one–fourth of the sourcing for auto loans is from the new-to-credit segment; we have observed that the risk in this segment is higher in the overall portfolio as compared to consumers who already have a credit presence. During the same period, the share of NBFCs in sourcing auto loans to the NTC segment has gone up by 10%, indicating a shift towards the composition of the overall portfolio as well,” Kalyanasundaram added.


“Our portfolio quality is intact. We have strategically stayed away from the potentially weak segments and hence do not see any stress in this segment,” said Rajan Pental, senior group president and group head and retail banking, YES Bank.


Other banks active in the auto loans and commercial vehicle loans financing segment are HDFC Bank, IndusInd Bank and ICICI Bank.


“Vehicle finance segment of NBFCs is likely to witness increased operating and credit-related costs, going forward, as entities increase the share of used vehicles and focus on borrowers with relatively modest credit risk profiles to offset the impact of the increase in their borrowing costs,” Karthik added.


“In India, auto loan delinquencies will increase over the next few months, on the back of slowing economic activity, before going back down to current levels by the end of 2019, when the economy is expected to improve,” Moody’s warned in a report last week.