Leading banks squeeze money flow to car dealers after inventory pile-up

Banks, which are aware of the retail car sales trend, are also apprising manufacturers of the critical situation and asking them not to push more stocks to dealerships

Leading banks have turned extremely cautious of funding inventories of car dealers, who are sitting on an abnormally high number of unsold vehicles after a sluggish festive season. 

Manufacturers had built large inventories with dealerships in anticipation of high demand. However, the festive demand turned out to be lower than that of last year with high fuel prices, higher insurance cost, and interest rates acting as dampeners among prospective buyers.

A number of private banks have put a freeze on the overdraft facility of car dealers. Banks, which are aware of the retail car sales trend (as they also finance retail transactions), are also apprising manufacturers of the critical situation and asking them not to push more stocks to dealerships. 

“Depending on the movement in stock, coupled with new model launches, we have been taking calls for temporary limits on a case-to-case basis,” said Rajan Pental, senior group president and group head (branch & retail banking) at YES Bank. HDFC Bank, one of the leading players in the space, did not respond to queries.

According to the Federation of Automobile Dealers Associations (FADA), the apex association of automobile dealers, the registration of (PVs) passenger vehicles (cars, vans, and utility vehicles) has declined by 14 per cent to 287,717 units in the festive season of 2018, compared to last year. 

“We have not seen such a dull festive season in the past few years as many negative factors came into play during this season, which weakened consumer sentiment and postponed their purchase decision. It is a matter of deep concern for the dealer community,” Ashish Harsharaj Kale, president of FADA, said. 

FADA has said that the registration of PVs is down by over 1 per cent since April 2018, compared to 6 per cent growth in the wholesale number of manufacturers.

Dealers, who have seen a sharp rise in working capital needs after the goods and services tax came into effect in July 2017, are finding it almost impossible to service their repayment obligations as significant capital has been blocked in the inventory. 

“We are monitoring the stock levels on a monthly basis. There is also interaction with manufacturers on a case-to-case basis and we see a gap between sales, funding available, and stocking levels. We are hopeful that with the December sales being traditionally high, all the stock liquidation will be taken care of,” added Pental. 

Multiple dealers of leading brands like Maruti Suzuki and Hyundai in the Capital said they were sitting on a stock equivalent to 45 days of sales, unlike their usual stock level of up to 30 days. Dealers in smaller cities and towns are sitting on an inventory of two-three months. In many cases, dealers whose finances are stretched have resorted to funds from informal channels at interest rates as high as 3 per cent a month to meet the payment schedule of banks.

“Until last year, representatives of most banks would visit us regularly, offering attractive financing options. All of that has stopped this year. I was recently suggested by one of my private bankers to shift all my business to a public sector bank. We are getting reminders from banks a month before the due date of a repayment,” said a businessman who runs two dealerships of different brands in Uttar Pradesh.

In cases where dealers have not been showing profit, the banks are revising funding limits. “We used to depend on non-banking financial companies (NBFCs) along with banks for our funding requirements. While banks have turned cautious, NBFCs are not even disbursing money for approvals that were taken beforehand,” said a Delhi-based dealer with multiple outlets of a leading brand.

The fallout of the above is going to be visible in the wholesale numbers that carmakers will report for November and December. “Manufacturers have been forced to do a downward revision of targets given to dealerships. Unlike in the past, these targets are being given after a dialogue with the dealers. The relaxed targets must be met, companies have told us,” said another dealer in the Capital.

The PV segment clocked a decline in sales for three consecutive months from July to September and managed to grow by just 1.5 per cent in October. The trend shows it will be highly difficult, if not impossible, for players to achieve the growth target set at the beginning of the year. 

R S Kalsi, senior executive director (marketing and sales) at Maruti Suzuki, is positive. “Now oil price has started coming down and inflation appears to be under control. All these give a sense of optimism and we will strive to reach the target of double-digit growth,” he said last week. The company has seen 9.1 per cent growth in domestic sales during April-October to 1.04 million vehicles. He claimed the inventory with Maruti Suzuki dealers was well “under control”.
 
Hyundai said it had usually maintained an average inventory level of 35-40 days on the basis of retail seasonality and it was well prepared for December, which it expected to be a retail month. “Our inventory levels are well controlled and supported by a timed launch of the new Santro last month”.