Borrowers' falling fleet use, cash flows to hit vehicle financers: Ind-Ra

Drop in collection efficiency to materially impact vehicle financers' asset quality, as rising fuel cost would reduce borrowers' ability to service debt

With the second Covid-19 wave denting economic activity in India, vehicle financers' collection efficiency may dip by 5-7 per cent in the first half of current month. This hit would be on the top of a similar decline in April over March 2021, according to India Ratings.

The fall in collection efficiency will have a material impact on vehicle financers’ asset quality as borrowers are grappling with reduced capacity utilisation. Also, increased operating costs due to a rising fuel cost, which would reduce borrowers' ability to service debt.

The industry has faced multiple challenges starting from demonetisation, goods and services tax rollout, increased system capacity through the axle norms revision to these ongoing pandemic waves.

The impact of the first covid wave was cushioned with multiple measures such as regulatory moratorium, loan restructuring, additional funding through the emergency credit line guarantee scheme. The sharp pent-up demand recovery which raised optimism about faster-than-expected normalisation also helped to face adverse impact. However, the outcome may be different during the second wave, due to the widescale impact, including rural areas and pent-up demand being absorbed already, rating agency said.

With reduced borrowers’ saving and rising operating cost due to fuel inflation, the excess capacity had its offsetting impact on freight contract renewals or market freight rates, all impacting borrowers’ cash flows.

Early demand indicators, such as the E-way bill, diesel consumption are showing signs of moderation and asset inflation (rising raw material prices likes steel and cement). It would impact demand offtake and thus load availability. Thus, both demand and rising operating cost would moderate borrowers’ cash flows in FY22.

The lenders’ collection efficiency would also be affected by restricted mobility as the second wave has spread across all geographies. Thus, Ind-Ra has a negative outlook on commercial vehicle finance as an asset class.

There are emerging trends of rising loan tenures across vehicle financers to reduce servicing burden for borrowers, however these could led to a rise in loss given defaults for collaterals, it added.