Two-wheeler dealers fear default on loan repayment as inventory levels rise

Ayushi Kar Mumbai | Updated on July 02, 2021

Covid second wave and subsequent lockdown impacts sales

Suppressed demand due to the Covid second wave and subsequent lockdown has pushed up the inventory levels of two-wheelers at dealerships across the country. Compared to an inventory of 15-20 days prior to the lockdown in the first quarter of 2020, the inventory has climbed up to 41-46 days at the end of the fourth quarter of 2021. This has put a majority of dealers in the two wheeler segment in the danger of defaulting on credit.

Vinkesh Gulati, President, FADA told BusinessLine “We already started the lockdown with a high inventory level of 40-plus days. After which, there have been no sales. A typical tranche cycle of a bank is 30-45 days, after which the dealers have to repay the loans. The dates for the repayment of loans are approaching. However, dealers are yet to sell off their inventory, so they don’t have the money to repay.”

According to the latest vehicle registration data published by the Federation of Automobile Dealers Associations (FADA), average inventory for two-wheeler ranges from 30 – 35 days at the end of April.

Above normal inventory

According to global analytics company, CRISIL, inventory range for the two wheeler segment has been above normal since the onset of the pandemic from the second quarter. “Our interactions with two wheeler dealers suggest that muted consumer sentiments have resulted in dealer inventory being above normal since the second quarter of fiscal 2021. Two-wheeler retail sales have failed to pick up in fiscal 2021 owing to significant increase in cost of acquisition, surge in petrol price and decline in income levels of two-wheeler buyer segments.” said Hetal Gandhi, Director of Crisil Research

Auto dealerships secure new stocks of inventory by securing credit from banks or securing inventory funding. This line of credit is paid back in cycles of 30 days, once the inventory is sold. In case of default, the dealership will suffer a loss in credit ratings, making securing of future loans more difficult. Default also increases the rate of interest at which dealerships have to pay back the loan.

‘No retail happening’

“At the moment two-wheeler auto dealerships have the cash flow to manage fixed expenses of a month or two, but we are not capable of making repayments to the banks, since no retail is happening as of now. Right now our priority is to get out of the lockdown as fast as possible, and for OEMs to give us interest free support whenever the lockdown is lifted, as well as for the banks to give us a few days extension to compensate for the lockdown period,” said Gulati.

According to Bharat Chordia, an auto dealer in Chennai, there are two reasons for high inventory levels. Firstly, as a consequence of the pandemic in key demographic such as young adults and young professionals and the rural areas, which have been especially affected in the second wave have caused demand suppression. Along with this many OEMs mandate dealers to carry an inventory stock of 35-40 days.

“Two wheeler OEMs have not been very sensitive to the profitability and business continuity of our dealerships. In case we do not get help, it will affect the entire segment since banks will pull out citing us to be a risky portfolio which would be really bad dealers,” Chrodai said.

Last year RBI offered moratoriums. “This has yet to be announced yet, what we need the most is an extension linked to the number of days in lockdown or some sort of restructuring of credit,” he added.

Pranav Shah, a two wheeler auto dealer in Gujarat predicted that over 50 per cent of the two-wheeler dealers in the country will default on credit unless some assistance is not given quickly. “In order to aid retail sales, OEMs have rolled out discounts, part of which is being borne by dealers, thereby further denting dealers’ profitability. Hence, any further build-up of inventory could worsen situation for two-wheeler dealers,” said Gandhi.

Published on May 12, 2021

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