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Home / Business / How a shadow banking crisis sent India's auto sector into a spin

How a shadow banking crisis sent India's auto sector into a spin

MUMBAI (Reuters) – Sudhir Gharpure and his sales team sat and talked at a large Maruti Suzuki ( MRTI.NS ) dealership on the outskirts of Mumbai a few hours after opening its doors on a recent Saturday morning – not a single customer was in sight.

FILE PHOTO: A worker adjusts wipers of a parked car at a Maruti Suzuki depot on the outskirts of the western Indian city of Ahmedabad September 1, 2011. REUTERS / Amit Dave / File Photo

“It used to be close to 15- 20 orders a day, but now we are down to 3-5 on good days, ”said Gharpure, general manager at the dealership.

Gharpur's experience is not isolated. Throughout India, dealers are being squeezed out of business and the Indian car sector is experiencing the biggest decline in almost two decades. Sales of passenger cars fell for eight straight months until June, and in May sales fell 20.55% – the sharpest recorded decline in 18 years.

Preliminary data indicates that car sales may have plummeted as much as 30 percent in July. The decline in India, coupled with a simultaneous slide in Chinese car sales, is a blow to car manufacturers who are breaking with higher costs driven by stricter emissions standards and a pressure to develop electric cars.

Unlike in China, where the fall in car sales has been largely caused by new emission rules, India has seen a mix of factors that have combined to erode demand for cars.

Prime Minister Narendra Modi's 2016 ban on high value banknotes, higher tax rates under a new tax regime for goods and services, a boom of shipping companies like Uber and Ola, and a weak rural economy have all played a role.

But many dealers and car manufacturers agree that it is a deepening liquidity cream among India's shadow banks that has been the single biggest factor in a collapse of car sales, which fears could result in more than a million job losses. ] 2018.

IL&FS, or Infrastructure Leasing & Financial Services Ltd, was a shadow banker and its default and settlement, amid fraud charges, has dried up funding for rivals and led to an increase in borrowing costs.

Non-banking or shadow banking companies generate credit outside of traditional lenders using collective investment vehicles, broker-dealers, or funds investing in bonds and money markets.

In India, the NBFC has in recent years contributed to financing nearly 55-60% of commercial vehicles both new and used, 30% of passenger cars and almost 65% of the two-wheelers in the country, according to the rating agency ICRA.

To make matters worse, the stress in the car market has also caused banks to begin to trim exposure to the sector.

"The car is not selling, it is the economy selling," said R. Vijayaraghavan, senior marketing consultant at the same Mumbai dealership. "Today, the economy doesn't sell, so the cars don't sell."


Some 286 dealers have shut down over the last 18 months across India as rising inventory management costs have made businesses invaluable, according to the Federation of Automobile Dealers Association (FADA), a lobbying group of car dealers.

"The decline in the (NBFC) sector has slowed growth in car sales," said A.M. Karthik, head of the financial sector at ICRA. "Now automatic deceleration becomes more visible as liquidity pressure continues."

Automakers including Maruti Suzuki ( MRTI.NS ), Tata Motors ( TAMO.NS ), and Mahindra & Mahindra ( MAHM.NS ) feel the heat and has either cut production or temporarily closed plants to correct the mounting bearings.

According to FADA data, the stock of passenger cars now stands at 50-60 days up from around 45 days earlier, while the two-wheelers are even higher at 80-90 days. For commercial vehicles, stock levels vary between 45 and 50 days.

"We ask dealers to maintain a 21-day inventory, which is almost half of today's levels," said Ashish Kale, president of FADA.

At least four dealers from different brands said, but there was little room to reduce inventories as car manufacturers pressed them to buy stocks despite there being no demand even with heavy rebates and other sops on offer.

While 70-75% of car sales were previously financed internally by NBFC or banking agents who put on a dealership relationship, it has dropped to about 50%, dealers say, as buyers struggle to qualify under stricter lending standards placed by lenders. who are under pressure to hook up their books.

Moreover, like many NBFCs that are usually lent to less creditworthy customers, banks are reluctant to rush to fill the void as they themselves struggle to cope with an existing pile of around $ 150 billion in bad loans.

(Graphic: Delinquency levels in India auto loan – tmsnrt.rs/2MrgfWE)

"The banking sector is certainly one of the factors that has affected the growth of the industry," said R.C. Bhargava, chairman of Maruti Suzuki, notes that interest rates for car buyers have risen over the past 12 months despite the central bank having cut interest rates.


With the auto sector employing more than 35 million people directly and indirectly, contributing more than 7% to India's GDP and accounting for 49% of production GDP, the fallout from the car's decline is huge and presents a big challenge for Prime Minister Narendra Modi's government as it begins its second term.

The entire supply chain, from vehicle manufacturers to component manufacturers, is bleeding in the midst of decline.

"I've been paying for the last 30 years and lenders know me," said Adarsh ​​Gupta, CFO of Autolite (India), a component manufacturing company. “But even a two-day delay has people crying that I want to be standard.

"I also want to pay, but because of the fall in cash flows, I face short-term problems, and because of that, it is difficult to get more funding. This is the vicious cycle we are in."

Still is automakers hope for an improvement in the months ahead, helped by the September-December holiday that traditionally sees an increase in consumer spending.

"One can only wish things improved sooner and later. As festive demand begins to seep through, we should begin to see a gradual improvement in sales, says PB Balaji, CFO of Tata Motors.

However, analysts are more skeptical, and say without car financing becoming cheaper and easier, chances are low. Without silver lining in sight, analysts fear bad debt can increase in the auto industry, forcing banks to further reduce exposure.

"We see market prices and sales coming down, so there may be problems," said a topf a shareholder in the Indian Banks & # 39; Association. "We could see a drop in bad loans for the overall sector, but we will wait and see."

but it can be a lot more pain before a recovery starts.

"The future is going to be a multi-brand car brand room," said marketing consultant Vijayaraghavan. "It's the only way for dealers to survive in the future, because fixed costs must be shared."

Additional reporting from Derek Francis in BANGALORE; and Aftab Ahmed and Aditi Shah in NEW DELHI; Editing by Euan Rocha and Alex Richardson

Our Standards: Thomson Reuters Trust Principles.

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