How a parallel banking crisis has put the Indian auto industry in a free fall

MUMBAI (Reuters) – Sudhir Gharpure and his sales team discussed in front of a big Maruti Suzuki (MRTI.NS) in the suburbs of Mumbai about two hours after opening its doors on a recent Saturday morning – no customer was in sight.

"Previously, there were almost 15 to 20 bookings a day, but there are only 3 to 5 business days left," said Gharpure, general manager of the dealership.

The Gharpure experience is not isolated. Dealers in India are being abandoned and the Indian auto sector is in its greatest crisis in nearly two decades. Sales of pbadenger vehicles declined for eight consecutive months until June and May by 20.55%, the largest decline in 18 years.

Preliminary data indicates that pbadenger car sales may have fallen by 30% in July. The recession in India, coupled with a simultaneous decline in Chinese auto sales, is a shock for automakers who face higher costs, driven by higher emissions standards and higher emissions. a desire to develop electric cars.

Unlike China, where the drop in car sales was largely caused by the new emissions rules, India faced a combination of factors that contributed to eroding demand for motor vehicles.

Prime Minister Narendra Modi's ban on high-value banknotes in 2016, higher tax rates under a new goods and services tax regime, the rise of carpooling companies like Uber and Ola and the weakness of the rural economy have all played a role.

But many dealers and builders agree that the tightening of liquidity among Indian ghost banks is the main factor in the collapse of car sales. Some fear a loss of more than one million jobs.

The non-bank finance companies (NBFCs), or parallel banks, have significantly reduced their lending after the collapse of one of the largest, IL & FS, at the end of 2018.

IL & FS, or Infrastructure Leasing & Financial Services Ltd, was a giant of the shadow banking system. Its failures and unwinding, among the allegations of fraud, have dried up the financing of rivals and led to higher borrowing costs.

Non-bank or shadow banks generate credit outside traditional lenders, through mutual funds, investment dealers or funds that invest in bonds and money markets.

In India, NBFCs have helped in recent years to finance around 55 to 60% of new and used commercial vehicles, 30% of private cars and nearly 65% ​​of the country's two-wheelers, according to the French government. ICRA rating agency.

To make matters worse, tensions in the auto market have also prompted banks to start reducing their exposure to the sector.

"The car is not selling, it's the finance that sells," said R. Vijayaraghavan, senior marketing consultant at the same Mumbai dealership. "Today, finances do not sell, so cars do not sell."

AMPLIFIED PROBLEMS

According to the Federation of Automobile Dealers Associations (FADA), a lobby group consisting of car dealerships, 286 dealers have closed in India in the last 18 months.

"The slowdown in the sector (NBFC) has dampened the growth in vehicle sales," said A.M. Karthik, CIFAR's Financial Sector Manager. "Now, the automatic slowdown is becoming more visible as the compression of cash continues."

Car manufacturers, including Maruti Suzuki (MRTI.NS), Tata Motors (TAMO.NS), and Mahindra & Mahindra (MAHM.NS) feel the heat and have either reduced their production or temporarily closed factories to rectify their stocks.

According to FADA data, pbadenger car inventories are currently 45-60 days longer than about 50 to 60 days, while those of two-wheeled vehicles are still higher at 80-90 days . For commercial vehicles, inventory levels vary between 45 and 50 days.

"We are asking dealers to maintain a 21-day inventory, almost half of current levels," said Ashish Kale, president of FADA.

At least four dealers of different brands however indicated that there was little room for maneuver to reduce their inventories as builders encouraged them to buy shares despite the lack of demand, even with strong discounts and other promotional offers.

While 70% to 75% of car sales were previously financed internally by NBFC or concession bank agents, this figure dropped to around 50%, dealers say, while buyers struggle to meet standards stricter lending by lenders. who are under pressure to consolidate their books.

In addition, as many NBFCs generally lend to less credit-worthy customers, banks are reluctant to hurry up to fill the void, as they are struggling to deal with an existing pile of about 150 billion dollars bad debts.

"The banking sector is certainly one of the factors that have affected the growth of the sector," said RC Bhargava, president of Maruti Suzuki, pointed out that interest rates of car buyers had risen over the past 12 years. recent months, despite lower central bank rates.

RECOVERY EARLY WITHOUT BOOK

The automotive sector employs more than 35 million people, directly and indirectly, contributing more than 7% of India's GDP and 49% of its manufacturing GDP, the fallout from the collapse of the country's economy. are huge and represent a daunting challenge for Prime Minister Narendra. The Modi government begins its second term.

The entire supply chain, from car manufacturers to component manufacturers, is bleeding in the doldrums.

"I've been making payments for 30 years and lenders know me," said Adarsh ​​Gupta, finance director at Autolite (India), a component manufacturing company. "But even a two-day delay has caused people to shout that I will fail.

"I want to pay too, but because of the decline in cash flow, I face short-term problems and because of that, it's difficult to get more funding. It is the vicious circle in which we are.

Kale, the president of the FADA, said Sunday that the federation had estimated that concessions had already already reduced their workforce by about 7 to 8 percent, or about 200,000 jobs in the country.

"Most of the cuts that have taken place are upstream sales positions, but if this continues, even the technical positions will be affected, because if we sell less, we will also serve less," he said.

Nevertheless, automakers are hoping for a recovery in the months to come, helped by the holiday season from September to December, which has traditionally seen a rise in consumer spending.

"We can only hope that things will improve as soon as possible. As festive demand begins to infiltrate, we should begin to see a gradual improvement in sales, "said P.B. Balaji, group finance director at Tata Motors.

Analysts, however, are more skeptical and say that if vehicle financing becomes cheaper and easier, the chances of doing so are low. Analysts are worried that bad debts will increase in the auto sector, forcing banks to further reduce their exposure to risk.

"We are seeing a decline in prices and sales in the market, so that there may be problems," said a senior official of the Association of Indian Banks. "We could see spinoffs in terms of bad loans for the entire sector, but we will wait and watch."

Dealers said they hoped to overcome the current slowdown as India's overall growth remained intact, but that the recovery could hurt well.

"The future will be multi-brand car showrooms," said marketing consultant Vijayaraghavan. "This is the only way for dealers to survive because overhead needs to be shared."