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Weak economic activity coupled spread with of coronavirus pandemic to weigh on the asset quality of New MHCV financiers: ICRA

Published: March 26, 2020, 12:12 PM IST

Domestic non-banking finance companies (NBFCs), that had hitherto seen high disbursements towards new Medium & Heavy Commercial Vehicle (MHCV) segment, have witnessed a sharp contraction in disbursements in FY2020 following overall decline in MHCV sales volume. And now with the coronavirus outbreak, says an ICRA note, challenges for the financiers are likely to mount further. The new MHCV segment in the country is going through a challenging period due to reduction in investment activity, contraction in mining & manufacturing activity and falling order book of construction companies that has led to reduced availability of cargo and lower freight rates. This led to overall decline in sales of new MHCVs as the volumes fell to 21,388 units in December 31, 2019 from 43,650 units in December 31, 2018. Due to this original equipment manufacturers (OEMs) have resorted to production cuts and sharp reductions in wholesale dispatches to pare the inventory build-up. As a consequence, the non-banking financial companies (NBFCs) that had hitherto seen high disbursements towards new MHCV segment, have seen a sharp contraction in disbursements in FY2020 (refer Exhibit 1). The 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.

Giving more insights, Mr. Abhishek Dafria, Vice President and Head - Structured Finance Ratings, ICRA, says, "MHCV 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. 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 MHCV segment and consequently the AUM of the NBFCs."

ICRA has analyzed the portfolio level data of 10 NBFCs representing about 80% of the overall new MHCV finance market volume. The new MHCV 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 MHCV 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.

Adds Mr. Mukund Upadhyay, Assistant Vice President, "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."


DISCLAIMER: This information is published as per the press release sent to us. It has not been verified or ratified by OVERDRIVE.
Tags: Weak economic  |  activity  |  coupled spread  |  coronavirus pandemic  |  weigh  |  asset  |  quality  |  new  |  MHCV  |  financiers  |  ICRA  |  Domestic  |  non-banking  |  finance  |  companies  |  NBFCs
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