Vehicle Financers Facing Risks: India Ratings

India Ratings and Research (Ind-Ra) opines the second covid wave will have a material impact on vehicle financers' asset quality as borrowers are grappling with reduced capacity utilisation and increased operating costs due to a rising fuel cost, which would reduce their 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 along with a sharp pent-up demand recovery which raised optimism about faster-than-expected normalisation. 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," the rating agency has said.

Ind-Ra estimates the collection efficiency for the first fortnight of May could be lower by 5%-7% on the top of a similar decline in April over March 2021.

"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) would impact demand offtake and thus load availability.

Thus, both demand and rising operating cost would moderate borrowers' cash flows in FY22. Ind-Ra believes 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," India Ratings has said.

Lenders would be impacted in the medium term due to restricted mobility and moderating borrowers' cash flows. Collections have become difficult due to the surge in infected cases and would impact asset quality in 1HFY22. However, Ind-Ra notes lenders have shored up their capital and liquidity buffers to navigate the challenging environment. The strengthened capitalisation, and sizeable on-balance sheet liquidity and holding of margin due to a funding cost improvement in the last one year would provide some buffer to absorb incremental stress because of the second wave. Ind-Ra would monitor its rated issuers for the above sensitivities' basis the impact of the pandemic on the overall credit metrics.