Auto loan cos warn of sharp rise in bad debts due to Covid-19 lockdown

Analysts say the Rs 4 trn auto finance industry was the most impacted and had the lion's share of asset quality deterioration during the quarter

Auto finance companies are expected to post a sharp rise in bad debts due to Covid-19-related shutdowns announced by various State governments in April and May. The auto loan business of Bajaj Finance--the first non-banking finance company to announce results for June quarter--has reported a sharp rise of 19 per cent in bad debts in the June quarter, led by defaults in the two- and three-wheeler segments.

Tata Motors Finance Ltd, a subsidiary of Tata Motors, has already warned that June quarter will be challenging for the company due lockdowns impacting collections and new business generation. TMFL disbursals were down by 12 per cent to Rs 13,258 crore in the fiscal 2021 due to Covid-related shutdowns and falling auto sales and it is expecting a similar trend in the June quarter.  “Other non-banking finance companies are issuing similar warnings for the June quarter. While banks also have a large auto loans portfolio, the stress among the NBFCs is higher as they are giving loans to customers with a higher risk profile,” said the head of a mid-sized NBFC company asking not to be quoted.

Analysts said the Indian auto finance industry, worth Rs 4 trillion as on March this year, was the most impacted and had the lion's share of asset quality deterioration during the quarter among all companies. “If there are no more lockdowns, auto finance companies expect to be able to claw back on asset quality in the rest of the fiscal,” said an analyst with an Indian brokerage. “Though collection trends recovered to pre-Covid levels in the March quarter, they deteriorated in April and May as customers lost jobs and were unable to pay. Apart from three-wheelers, the taxi drivers also failed to repay their loans in the June quarter, leading to a sharp rise in bad debt,” said he.

Auto finance fortunes are linked to the automobile industry which had plant closures in the June quarter. The diversion of oxygen from industrial to healthcare led to the closure of automobile units for at least a fortnight during April-May, impacting the production and factory dispatches. The district/state wise lockdowns meant a shutdown of dealer showrooms.

Auto finance firms said they are expecting a turnaround in the current quarter as lockdows across India have eased and customers have started buying cars. Sequentially, wholesale volumes in June 2021 grew 2.6x for passenger vehicles, tripled for two-wheelers, grew 7.5x for three-wheelers, and doubled for tractors and commercial vehicles. A comparison with June 2020 (an abnormal month for the auto industry), also shows healthy growth across all segments, except three-wheelers. However, a comparison with June 2019 shows demand hasn't yet reached pre-Covid levels for two- and three-wheelers and CVs.