Why lending landscape for CVs is ripe for recovery

Commercial vehicle (CV) sales have picked up and, subsequently, credit demand for CVs has been showing a marked improvement since October 2021. The year 2022 is looking promising for freight rates and transporter profitability.

Economic activity, which had taken a beating in the last two years, is back on a revival path. The Union Budget also showed the unwavering focus of the government on infrastructure spending, which is budgeted at 19 per cent of spending in FY23. This clearly underscores that the government believes growth will be revived by capital expenditure (capex).

Credit demand for CVs, as well as freight rates, are currently improving. The idling of vehicles is at a minimum level now. Resale prices also are much better than last two years, and we expect them to improve further as economic activity revives. The continuation of the accommodative stance by the Reserve Bank of India (RBI) in the February policy also indicates that there will be no aggressive rate hikes in 2022, which is a positive for consumers. Crude prices have remained elevated due to the intensifying Russia-Ukraine conflict and that poses a threat.

Shifting demand

The new trend is that demand is shifting actively towards CNG, either fully built CNG vehicles or installing a CNG kit onto existing vehicles. This is limited to areas where CNG is available and not across the country, since CNG availability is mostly in the western corridor, like Mumbai to Delhi corridor. In other areas, where CNG availability is not strong, the government has promised to add 6,000 more CNG pumps across the country, thereby improving the viability for the customers. In fact, due to the lower cost of operation on account of price difference of around 35 per cent and higher penetration, demand for CNG powered trucks is on the rise.

We expect a higher shift in lending to CNG-powered trucks from diesel-powered trucks in FY23.

There has been strong demand for larger CVs, too, and we are seeing demand for credit too also shifting towards new vehicles and bigger ticket sizes in terms of heavy vehicles, including construction equipment. That will give us a little momentum on lending, too. So, volume will be higher in FY23 compared to 9M FY22 as well. Also, with additional tonnage being allowed, there is a rising demand for 16-wheeler vehicles compared to 12-wheelers earlier.

Earlier, the maximum ICV (Intermediate CV) carrying weight was 7.5 tonnes, now it’s up to 9.5 tonnes. Thus, today’s ICV is nothing but the earlier medium and heavy CV; so, there is a change towards higher ticket size loan for CVs and the type of vehicles are also changing.

The Budget’s focus on infrastructure spending will lead to immediate demand for infrastructure-related vehicles and equipment. The overall capex is higher by 36 per cent, driven by an increase in the transport sector outlay. Thus, demand from sectors such as infrastructure development, construction, mining, cement, steel, housing and urban infra, augurs well and is expected to provide the much-needed push to the CV Industry. The proposed expansion of the National Highway network by 25,000 km in 2022-23 will be beneficial for CV demand. For FY23, the Finance Minister allocated ₹48,000 crore for the PM Housing scheme. In FY23, 80 lakh houses will be completed for the identified eligible beneficiaries of PM Awas Yojana, both rural and urban, which will both drive construction.

Additional PLI outlay for food processing, solar, telecom & networking products and large-scale electronics and IT hardware will help promote domestic manufacturing and drive-up movement along with higher credit demand. ECLGS (Emergency Credit Line Guarantee Scheme) has been a successful scheme during the pandemic saving many MSMEs from the risk of winding down or falling into the bad loan category.

Its extension to March 2023 and additional outlay of ₹50,000 crore, taking it to a cumulative ₹5-lakh crore, will provide further support to the MSME segment which is in revival mode. Demand for CVsCV volumes have improved so far in FY22 due to healthy demand for both passenger and cargo segments. However, the CV industry is a long way off from its historical peak volumes. The smaller retail customers are yet to come back fully to buy new vehicles. At present, customers are mostly content with pre-owned vehicles, though the demand is slowly and steadily picking up for new vehicles as well.

We expect a robust double-digit growth for the CV industry over FY22-23, supported by low-interest rates, government thrust on infrastructure spending, recovery in replacement demand, along with rising new-vehicle demand.

On the lending front, NBFCs play a crucial role in the economy by providing credit to the underserved segment. We believe the lending landscape for CVs is ripe for recovery. Most NBFCs have witnessed higher disbursements and organic improvement in asset quality during the 9M FY22. However, the RBI’s February 2022 circular on NPA classification led to a rise in the reported bad loan numbers by all players within the NBFC segments. To implement this NPA classification, the RBI has given an extension till September 2022, which will benefit the bottom line. We are glad that extension has been given by the RBI, as it will give more time to NBFCs and also it will put less pressure on the overall borrower’s credit profile.

We still wish that individual entrepreneurs and MSMEs below a certain outstanding amount should get a total exemption, as their cash flow mismatches continue to remain for the long term. We are also hopeful that the government’s focus on capital spending along with the RBI’s accommodative stance will go a long way in supporting broad-based economic revival and aid revival in CV sales.

Post the challenges posed by the pandemic, the overall economic recovery is still uneven, indicating a K-shaped recovery, as certain segments continue to remain a drag and that has impacted MSMEs. The government and the RBI have taken several measures towards economic revival and supporting the most impacted sectors. However, given that the economic recovery is still at a nascent stage, several sectors do need continued regulatory support.

The writer is VC and MD, Shriram Transport Finance Company

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