Lenders feel the heat of slowing car sales

India’s vehicle financiers are feeling the heat as auto loan growth has decelerated to 15% year-on-year (y-o-y) at the end of June from 23% in the same period last year. This includes loans for both four- and two-wheelers.

Even as demand for luxury vehicles and two-wheelers have remained steady, the large chunk of mid-segment four-wheelers is seeing muted demand, largely owing to the significant surge in prices of such vehicles, according to industry participants. 

Add to this elevated loan rates for the bulk of the past two years, and demand from retail borrowers has shrunk significantly from the exuberance seen in the post-pandemic period. Large banks such as SBI, HDFC Bank, Punjab National Bank, ICICI Bank and Bank of Baroda are currently offering car loans starting at 8.75% rate of interest, compared to starting rates of 7-7.25% about two years ago.

In Mahindra Finance's Q1 earnings call, managing director and chief executive officer Raul Rebello said that growth in passenger vehicles, which comprise 41% of the overall loan mix, has tapered and moderated to around 3%, which is much lower than past quarters.

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Bajaj Finance managing director Rajiv Jain said on 23 July that while the non-banking financial company (NBFC) is looking to grow its new car portfolio, it is “very hard to make money" in the segment due to high competitiveness and fine pricing by peers amid the sectoral slowdown.

On the other hand, lenders also seem to be facing repayment delays in their dealer finance portfolios as dealers, sitting on high inventory stock, are seeking extensions in credit lines and repayment deadlines, weighed down by the slowdown in sales.

While so far the balance sheets of lenders have been protected due to steady growth in other segments and sanction of higher loan values, they are now watchful of the impact of the sustained slowdown in PV loans on their loan growth and any impending stress in their dealer finance portfolios.

The bulging inventory 

According to the Federation of Automobile Dealers Associations (FADA), inventory levels for PVs surged to a record high of 67-72 days in July 2024, equating to ₹73,000 crore worth of outstanding stock. This is despite the fact that the month saw healthy retail sales growth of 14%, with PV sales growing 10%, and two-wheelers, 17%.

According to FADA, the inventory pile-up was largely an outcome of rise in wholesale production prices and softer demand ahead of the festival season. Auto manufacturers and lenders, too, have said auto sales tend to slow down ahead of the festival season, typically beginning in the third quarter of every financial year.

Others said that PV sales tend to normalise after every two-three years of strong growth.

“Everybody is sitting on surplus stock," said Y.S. Chakravarti, managing director and chief executive officer of Shriram Finance. “Passenger vehicles (PVs), which were on six to nine month waitlists till a few months back, are now available on the showroom floor. Most manufacturers have also cut down prices across models to try to liquidate inventory."

“The PV segment is facing a significant challenge," said Vinkesh Gulati, chairman - research at FADA, adding that the high inventory is resulting in dealers paying approximately ₹560 crore in interest per month at an annual rate of 9%. 

"This issue began in May, when retail sales started declining, but dispatches continued to grow. Till June, dispatches outpaced retail sales, and August so far is seeing a year-over-year decline in registrations. However, OEMs (original equipment manufacturers) may not reduce wholesale dispatches significantly, exacerbating the problem." 

Gulati added that OEMs, which typically provide discounts or incentives to help dealers with interest payments, have not offered help on the interest front this time. 

To be sure, inventory levels have been elevated for some time now. A year ago, inventory levels were 50-55 days in July 2023, equating to outstanding stock worth ₹49,833 crore. In June 2024, inventory was between 62 and 67 days, with a stock value of ₹60,000 crore, according to FADA.

This consistent pile-up of inventory indicates that the slowdown may be more dire, with most industry experts pegging PV sales growth for FY25 at mid-single digits. 

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Rating agency Icra in a recent note said it expects domestic PV sales volume growth to moderate to 3-6% in FY25 from 8% in FY24, on account of waning replacement demand and some effect of high base.

Per data from FADA, retail deliveries of the automobile industry grew 13.84% y-o-y in July 2024; PVs were up 10.18%, two-wheeler sales up 17.17%, and three-wheelers were up 12.88%.

On the wholesale front (company to dealer delivery), PV deliveries to dealers have grown 1.8% y-o-y in April-July 2024, and two-wheelers and three-wheelers have grown 18.5% and 11.7%, respectively, in the same period.

A note by Axis Securities earlier this month said that Maruti Suzuki India’s entry-level car segment and SUV deliveries declined by around 11.3% and 9.3% on-year, respectively. This resulted in total PV sales de-growth of 3.6% y-o-y (with domestic sales down 5.3% YoY) for the company, as per the note.

Perking up demand

Auto manufacturers, on their part, have been slashing rates across models to incentivise demand, a trend that lenders are expected to follow closer to the festival season to spur demand at their end. The festival season usually sees offers and discounts by banks and NBFCs on new loans for purchases such as cars and homes and benefits on higher spending.

“With high inventory levels, financing has become a critical factor in driving sales and influencing consumer purchasing decisions. OEMs strategically introduce various schemes to stimulate demand," said Vineet Tripathi, chief business officer, Rupyy, the lending arm of the CarDekho Group.

Given the surge in PV sales in recent years has been driven by rising disposable incomes, urbanisation, growing middle class and favourable financing options, manufacturers and lenders are quick to point out changing consumer preference for high-end models and luxury vehicles, even if they are used vehicles.

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“There is no low-segment car anymore. Everyone wants an SUV or sedan, which are more expensive. So, ticket sizes have also risen and repayment or EMI tenures are getting longer," said an official at a mid-sized private bank on condition of anonymity.

This, in turn, has led to elongation of replacement and upgrade cycles for new vehicles, resulting in a shortage in supply of second-hand vehicles, where demand continues to be strong given the significant price difference and the entry of several new organized players in the market. 

Moreover, lending rates for used vehicles are higher at around 10.8-16.3% compared with rates of 8.3-14.1% for new cars, helping lenders somewhat during this credit offtake crunch.