Increased fuel costs would lower borrowers’ ability to service debt, hence a drop in collection efficiency would have a significant impact on car financers’ asset quality.
Vehicle financers’ collection efficiency may drop by 5-7 percent in the first half of this month as the second Covid-19 wave dampens economic activity in India. According to India Ratings, this hit would come on top of a comparable drop in April 2021 compared to March 2021.
Because borrowers are dealing with reduced capacity utilisation, the drop in collection efficiency will have a significant impact on vehicle financers’ asset quality. Increased operational costs as a result of rising gasoline prices, reducing borrowers’ capacity to service debt.
From demonetisation to the rollout of the goods and services tax, increased system capacity through the change of axle rules, and now these ongoing pandemic waves, the business has encountered numerous obstacles.
Multiple measures were taken to mitigate the impact of the initial covid wave, including a regulatory moratorium, loan restructuring, and supplementary money under the emergency credit line guarantee programme. The strong recovery in pent-up demand, which fueled hope about a faster-than-expected return to normalcy, also aided in mitigating negative effects. From demonetisation to the rollout of the goods and services tax, increased system capacity through the change of axle rules, and now these ongoing pandemic waves, the business has encountered numerous obstacles.
Excess capacity had an offsetting effect on freight contract renewals or market freight prices, all of which impacted borrowers’ cash flows, due to reduced borrowers’ savings and higher operating costs due to fuel inflation.
Early demand indicators, such as the E-way bill and diesel use, are indicating that asset inflation is slowing (rising raw material prices likes steel and cement). It would have an effect on demand offtake and, as a result, load availability. As a result, borrowers’ cash flows in FY22 will be moderated by both demand and rising operating costs.
There are developing trends among vehicle financers to increase loan tenures in order to decrease borrowers’ servicing burdens, but this could result in an increase in loss due to collateral defaults, according to the report.
