Cash crunch at NBFCs set to curb two-wheeler volumes: report

Non-banking financial companies (NBFCs) are likely to witness severe cash crunch due to the near-term maturity of commercial papers (CPs) subscribed by mutual funds, affecting sectors reliant on them for funding, especially the two-wheeler segment, warns a report.

The two-wheeler financing has increased from 30 per cent in FY14 to 50 per cent in FY18, driven mainly by NBFCs.

The share of NBFCs, including captives ones, in two-wheeler financing is now at around 60 per cent, according to a report by Credit Suisse.

"For NBFCs, large upcoming maturities in the next two months is a challenge, given they have mutual funds constituting 25-40 per cent of their borrowings," says the report.

The imminent slowdown in NBFCs' growth can further impact sectors reliant on them for funding in the near-term, the report warns.

While other segments like passenger vehicles, commercial vehicles and tractors are relatively well penetrated in terms of financing, with a relatively stable mix of banks and NBFCs, the shadow banking systems exposure is significantly higher in the two-wheeler segment.

"Exit of some banks from two-wheeler financing has left an open space for NBFCs to step in and increase finance penetration," the report notes.

Easy availability of funding combined with rising LTVs has been a key driver of two-wheeler volume growth in the past five years, it says, adding liquidity condition is likely to be tight in the festive season.

"A funding crisis at NBFCs could not have come at a worse time given that the upcoming festive months which account for 25 per cent of two-wheeler sales," notes the report, adding the season accounts for 25-30 per cent of annual volumes for tractors.

The Swiss brokerage, therefore, has been cautious on two-wheeler original equipment makers anticipating a slowdown in demand in FY20/FY21 on regulatory cost headwinds; tighter funding provides an additional reason, it says.

Within two-wheelers, Eicher has the highest share of vehicles sold on finance and does not have a captive finance arm, unlike Hero, TVS and Bajaj, and hence could be the most impacted, it says.