Financing of new medium & heavy commercial vehicles (MHCVs) by non-banking finance companies (NBFCs) will continue to remain subdued in FY21 as MHCV unit sales growth is expected to be muted, according to ICRA. A weak macroeconomic environment and increase in prices due to the move to BS-VI are expected to hurt unit sales.

The credit rating agency also cautioned that weak economic activity coupled with the spread of the coronavirus pandemic will weigh on the asset quality of new MHCV financiers.

Domestic NBFCs, which had hitherto seen high disbursements towards the new MHCV segment, have witnessed a sharp contraction in disbursements in FY20 following the overall decline in MHCV sales volume, ICRA said in a note.

And now, with the coronavirus outbreak, the challenges for the financiers are likely to mount further.

The agency observed that the new MHCV segment in the country is going through a challenging period due to a reduction in investment activity, contraction in mining and manufacturing activity and falling order book for construction companies that has led to reduced availability of cargo and lower freight rates.

This in turn led to an overall decline in sales of new MHCVs; the volumes fell to 21,388 units in December 2019 from 43,650 units in December 2018. Original equipment manufacturers (OEMs) have resorted to production cuts and sharp reductions in wholesale dispatches to pare the inventory build-up.

As a consequence, the NBFCs that had hitherto seen high disbursements towards the new MHCV segment have seen a sharp contraction in disbursements in FY20, said the report.

ICRA said the monthly disbursements of key originators, at an aggregate level, fell by almost 60 per cent to ₹1,260 crore in December 2019 from about ₹3,000 crore in March 2019.

There has been a material increase in delinquencies in the current fiscal, with the 90+dpd (days past due) and 180+dpd increasing to 6 per cent and 3 per cent respectively as on December 31, 2019.

Abhishek Dafria, Vice President and Head - Structured Finance Ratings, ICRA, said, “The threat of coronavirus is expected to disrupt vehicular traffic as the Central and State governments resort to tough measures to combat its further spread. A prolonged period of disruption, production loss due to shutdown of manufacturing units and the resulting impact that would have on economic growth reduces the prospects of any immediate improvement in the disbursement levels for the new MHCV segment and consequently the AUM (assets under management) of the NBFCs.”

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