The second Covid-19 wave will have a material impact on automobile lenders’ asset quality as borrowers are grappling with reduced capacity utilisation and increased operating costs due to rising fuel cost, which would reduce their ability to service debt, says a report of India Ratings.

The impact of the first covid wave was cushioned with multiple measures that boosted optimism and recovery. 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.

Collections hit

April 2021 collections for most of the lenders remained at a decent level since the first 15 days were broadly normal across the nation. Top public sector bank State Bank of India had 95-96 per cent collection efficiency in April 2021. However, increase in localised and regional lockdowns has impacted collections of the lenders for the month of May 2021, according to industry representatives.

India Ratings estimates that the collection efficiency for the first fortnight of May could be lower by 5-7 per cent on the top of a similar decline in April over March 2021.

With reduced cash flows 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 prices of raw materials such as 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.

Restricted mobility

Lenders’ collection efficiency would also be affected by restricted mobility as the second wave has spread across all geographies. Thus, the rating agency has a negative outlook on commercial vehicle finance as an asset class.

There are emerging trends of rising loan tenures across vehicle lenders to reduce servicing burden for borrowers. Incrementally, all vehicle segments would be impacted by the pandemic as it gets widespread, hindering business activity and thus affecting borrowers’ cash flows.

Capacity utilisation levels have been significantly affected across the heavy commercial vehicle segment. The earlier estimate of replacement demand driving lenders’ growth would take a backseat, as normalisation would be a long-drawn process with borrowers looking at increasing utilisation on existing fleet rather than purchasing new vehicles.

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 during the first half of this fiscal, said India Ratings.

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