The recent reduction in exposure by the auto finance companies seems to have increased the auto debt blues by a significant extent.All these make the situation much more difficult, if not worse for the dealers.
- It is seen that banks as well as alternate sources of lending are now more cautious while they loan out money to the borrowers as well as the dealers. This change in business policy comes as a result of the rise in defaults of the credit extended to the dealerships.
- In addition to that, it is also seen that the traditional banks and other financial organization are now seeking higher collateral for lending money to the dealers for inventory funding. At times they even want collateral as high as 100% of the loan amount.
Top money lenders have faced an increased number of such defaults over the last two financial years. This has also resulted in a potentialdelay in the recovery as well in this sector which is already struggling due to the weak demand.
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The liquidity crunch
The reduction in exposure by the lending institutions has led to a crunch in the liquidity especially at the Non-Banking Financial Companies or NBFCs. Both public and private sector banks have also reduced their lending to the automobile dealers as a result of the dramatic fall in the sales of cars that has sent them reeling under default loans.
- This has resulted in the mounting bad debts in the auto sector forcing the banks, even the leading ones, to seek high amount of collateral for a loan, often as high as 100%.
- Another significant reason for the liquidity crunch is the change in bleak outlook of the automobile manufacturers that has also made the banks and financial institutions to be extremely cautious while extending fresh loans to the dealers.
Moreover, the banks now seem to assess each loan application on a case to case basis making it all the more difficult for a few manufacturers to get credit. This tightening of lending policy and terms comes at a time when the NBFCs have already held back fresh lending to the dealers due to the limited liquidity in their systems.
Since banks and financial institutions cannot look for alternative relief just as the consumers can at different sites such as National DebtRelief.com and other, at the most what they can do is regulate their lending policies.
The current scenario
The present scenario of auto debts has reached to such an alarming state that the banks and other traditional financial institutions have ceased to accept letters of comfort from the OEMs or Original Equipment Manufacturers even. Previously, it was easy to get a credit using such letters of confirmation as that was enough to suffice the requirements of the traditional banks. This is a recent development that has affected the entire auto industry.
- Now the dealers who previously used such bank loans typically to purchase stocks from the automobile manufacturers now find it difficult to do so.
- This crunch of funds in the hands of the dealers mean there will be less stock in hand and therefore it will hit the auto sales overall in the domestic market.
- Low sales volumes and high cost of maintenance of showrooms, staffs, ads and marketing have resulted in stressed balance sheets.
- With low sales turnover and profit this has eventually forced a multiple auto showrooms, including several showrooms that sell some of the major car models and brands, to roll their shutters down.
This is the scene across the country as the auto industry operates on a national scale and few even operate in a global scale.
Considering the perspective of dealers
The fact that banks and financial institutions including NBFCs have reduced credit to the dealers being overcautious can also be blamed on the different activities of the dealers. It is these activities that are unplanned and improper that resulted in such a huge number of defaults.
- Most of them were more interested in investing on shortterm loans for purchasing longterm assets such as real estate for showrooms
- They also invested in activities and businesses that are not related to their primary business, auto sales.As a result they have defaulted on their loans.
However, the dealers are not to be blamed 100% for such results. It is found that most of the dealers most of the times are under immense pressure from the car manufacturers make more investment. In the process, they take out more credit than their ability to repay because the sales volume remains at a low point.
In addition to that, the 100% collateral requirement by the banks now has made them stand in the middle of nowhere not having any suitable options available to them.
Availability of liquidity
The constriction of the credit norms by the banks have not only affected the auto dealers in a negative way but has also affected the final outcome of the banks as well. This is because this strict requirement goes beyond drop in sales of cars in the recent times as a result of which hundreds of dealers have closed down their shops.
Such a policy followed by the banks has resulted in the scarcity of overall liquidity which is typically the marker for the banking system. As a result, even the banks are facing the wrath of liquidity crisis.
Role of the banks questioned
Considering the entire scenario of the auto lending market, the role of the banks are also questioned by the industry experts. They say that banks have extendedmore credit in the past because the automarket was doing quite well. However, the collapse of a few NBFCs has prompted them to tighten their credit norms all of a sudden.
- This means that the number of bad loans has increased because it simply has from one sector to another.
- This has also compelled the dealers who are financially healthy generate the required cash internally.
Well, in this time, the need is to reduce stocks by automanufacturers and not credit.