PSBs may ease credit access to automobile dealers to boost sales

In a bid to arrest the slump in the automotive and ancillary sector and boost sales of motor vehicles, the Narendra Modi government could instruct state-owned banks to ease credit conditions and repayment thresholds to automobile dealerships. 

Banks looking to reduce their exposure to the troubled industry have been demanding 25 per cent collateral for inventory financing. The decision by banks followed a few cases of defaults by automobile dealers. This proposal, along with other measures to boost specific sectors and the overall economy, was discussed in meetings on Independence Day held between Prime Minister Narendra Modi, Finance Minister Nirmala Sitharaman, and senior officials of the Prime Minister’s Office and the finance ministry.

Some sops are expected over the coming few days. Among the announcements could be steps to support foreign portfolio investors impacted by the super-rich surcharge. Among the sectors discussed in Thursday’s meetings was automobiles. According to officials, easing credit for dealerships is one of the incremental measures that the Centre is considering for a sector hit by retrenchments, given that it is unlikely to go ahead with the one the auto industry wants most. As reported earlier, the finance ministry may not propose a cut in the goods and service tax (GST) rate for motor vehicles to the GST Council just yet, because it believes the slowdown in the automobile sector is primarily cyclical.

In a fiscally challenging year, the Centre will assess the potential revenue foregone from any reduction in GST rates for four- and two-wheelers from the current 28 per cent, before proposing a cut. Four- and two-wheelers for commercial or personal use — except electric and clean energy vehicles, vehicles for the disabled, bicycles, rickshaws, etc. — are in the 28 per cent GST bracket.

With sales of cars, tractors, and two-wheelers declining to 19-year low, reports suggest 300 dealerships have been shut down. The Society of Indian Automobile Manufacturers says about 1 million jobs have been hit in the auto component industry. Last week in a meeting with Sitharaman, the industry had raised an alarm, saying that without any steps by the government, there would be further job cuts.

Among the primary demands of the industry was a reduction in the GST rate from 28 per cent to 18 per cent, asking non-banking financial corporations to increase liquidity in the market, and relaxing lending criteria for auto dealers. “In the light of the slowdown, banks had become overcautious about lending to dealers, which has caused a tremendous hardship. We asked the government to relax the terms and conditions,” said Saharsh Damani, CEO of the Federation of Automobile Dealers Association.

In order to reduce its exposure to an ailing automotive industry, State Bank of India has decided to halt lending to dealers of Hyundai Motor India unless they provide a minimum of 25 per cent collateral. Dealers who have got loans from the bank will have to provide security of between 25 per cent and 50 per cent of the loan amount. If the Centre does tell state-owned banks to ease credit to dealerships, such moves will be rolled back.

With regard to foreign portfolio investors (FPIs) that are structured as trusts or associations of persons and hence are affected by the super-rich surcharge, the government is considering exempting or ring-fencing them. Though no changes were made in the Finance Bill in this regard, and the Finance Act is unlikely to be amended in the middle of the year, the ministry is understood to have sought the law ministry’s inputs.

If FPIs cannot be exempt from the surcharge, alternatives being examined include reducing the impact of the tax by grandfathering income generated by FPIs for a few months, which will reduce the impact of the tax, or not taxing FPIs on their move from trust structure to company structure.

(With inputs by Arindam Majumder)