Weak economic activity and Covid-19 to weigh on asset quality of new M&HCV financiers: ICRA

Domestic non-banking finance companies (NBFCs), which had earlier seen high disbursements towards new Medium & Heavy Commercial Vehicles (M&HCV), have witnessed a sharp contraction in disbursements in FY2020 following overall decline in M&HCV sales volume. Now with the coronavirus outbreak, challenges for financiers are likely to mount further, claims a latest report by ratings agency  ICRA. 

The M&HCV industry in India is experiencing a challenging period due to reduction in investment activity, contraction in mining and manufacturing activity and falling order book of construction companies, all of which have led to reduced availability of cargo and lower freight rates.

This led to overall decline in sales of new M&HCVs as volumes fell to 21,388 units in December 31, 2019 from 43,650 units in December 31, 2018. Due to this, OEMs have resorted to production cuts and sharp reductions in wholesale despatches to pare the inventory build-up. According to ICRA, monthly disbursements of key originators, at an aggregate level, fell by almost 60% to Rs. 1,260 crore in December 2019 from about Rs. 3,000 crore in March 2019.

Offering an insight, Abhishek Dafria, VP and Head - Structured Finance Ratings, ICRA, said, “M&HCV unit sales growth is expected to remain muted in FY2021 due to the weak macro-economic environment and also increase in BS-VI complied vehicle prices. This in turn implies that disbursements in the new MHCV loan portfolio of NFBCs will continue to remain subdued in FY2021".

Dadria added, "In addition, the economy would also have to face the challenges arising from the spread of the coronavirus (Covid-19) pandemic. 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 new M&HCV segment and consequently the AUM of the NBFCs.”

As per the report, ICRA  analysed the portfolio level data of 10 NBFCs representing about 80% of the overall new M&HCV finance market volume. The new M&HCV loan portfolio of these NBFCs grew at a CAGR of 27% i.e. from Rs 30,817 crore as on March 31, 2016 to Rs 61,470 crore as on March 31, 2019. However, the portfolio size has dipped in the present fiscal, with the fresh disbursements being even lower than the portfolio run-down. "The delinquencies (both softer and harder buckets) in the new M&HCV segment have witnessed a material increase in the current fiscal, with the 90+dpd and 180+dpd increasing to 6% and 3% respectively as on December 31, 2019." the report said. 

Adding to the rerprt, Mukund Upadhyay, Assistant VP, ICRA said, “While the NBFCs focus strongly on improvement in collections in the final quarter of the financial year typically, it may not be so this year with all routine business activities likely to be severely impacted due to the spread of coronavirus. The delinquencies in the new MHCV asset class could thus continue to remain high during H1 FY2021 before we start seeing any meaningful reversal in the trend.”