According to a note released by InCred Equities, there is a persistent slowdown in the new vehicle financing space (including commercial vehicles) led by delayed replacement demand, weak rural sentiment and seasonal slowdown due to monsoons.
“Sales have been weak in July and August 2024 on year basis and are expected to remain subdued in September quarter as well following low activity during the ‘Pitru Paksha’ period,” said Jignesh Shial, Head of BFSI Research at InCred Capital. “Our discussions indicate that all hopes lie on the expected demand pick-up in October on the back of the upcoming festive season.”
Meanwhile, the momentum in used vehicles remains relatively healthy, but stiff competition has affected lenders’ ability to price the risk appropriately.
Also, after the Reserve Bank of Indoa flagged risks on top-up loans experts are seeing a demand moderation in that segment.
Providing support to existing borrowers in the form of top-up loans especially in the case of commercial vehicle financiers has been a common practice. Such top-up loans are given mostly to the existing clients for productive purposes such as tyre replacement, insurance purchase, filling up fuel, working capital needs, as well for consumption purposes.
“The trend of such top-up loans continues at a healthy pace, but top-up loans given in the used car segment are seeing moderation after the rise in defaults as well as the displeasure expressed by the regulator,” Shial said.
Research conducted by InCred analysts also forecasts a high level of stress and EMI bounce rates. This is largely due to the semi-urban & rural economies that have come under heavy strain due to general elections in India, heatwave, and a delayed monsoon.
This resulted in a higher EMI bounce rate as well as increased bucket movements leading to a spike in credit costs for most lenders.
“We are seeing the trend of an elevated EMI bounce rate continuing in second quarter amid seasonality factors as well continued strain in rural and semi-urban geographies,” Shial said. “The leading indicators point towards the demand improving in the second half which should stabilize the EMI bounce rate, but we remain watchful of the debt servicing trend in this segment.”
As per InCred, considering the slowing growth and the potential volatile trend in asset quality, vehicle financiers with rising diversity, experienced management which has witnessed multiple cycles as well as lenders with an improved underwriting mechanism, will be able to perform well.
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