Global rating agency Moody’s on Monday said Indian vehicle financing companies, which heavily depend on short-term money, might face trouble in refinancing amid rapidly deteriorating macroeconomic conditions and tightening liquidity.
Vehicle finance companies in Indonesia and India were among the fastest-growing ones in Asia, benefitting from favourable economic and demographic conditions. But vehicle sales were now slowing as economic conditions worsened, Moody’s said in a statement.
A key risk for vehicle finance companies in India and Indonesia is their heavy reliance on short-term wholesale funding. This was highlighted by a default in September 2018 by IL&FS which triggered a liquidity crisis among non-bank financial companies. Liquidity risks for Indonesian vehicle finance firms, on the other hand, are lower, thanks to stronger profitability and asset quality, according to Moody’s.
Although Indonesian companies focus on riskier segments than their Indian peers, they have a stronger asset quality, and this further lowers liquidity risks. Stronger profitability helps Indonesian lenders maintain better asset quality by enabling them to write off and resolve problem assets quickly.
Also, Indonesian companies can apply stricter underwriting standards than their Indian peers because there is less competitive pressure from banks in that country. Further, because they have better profitability, Indonesian lenders have built stronger capital buffers and provision coverage against loan losses.
Moody’s also said that many companies in India had been making structural changes to strengthen their funding and liquidity since the breakout of the liquidity crisis after the IL&FS default. They are reducing exposure to short-term funding sources, such as commercial paper, while lengthening the duration of their liabilities. They are also tapping the securities market to obtain additional liquidity and increasing their stock of liquid assets.
Indonesian companies also actively refinanced maturing debt and extended the duration of their funding in 2018 in anticipation of an increase in market interest rates. Still, reliance on short-term debt remains substantial for both Indonesian and Indian vehicle financiers.