INSUBCONTINENT EXCLUSIVE:
dealership on the outskirts of Mumbai some two hours after its doors were opened on a recent Saturday morning - not a single customer was in
sight."There used to be close to 15-20 bookings each day, but now we're down to 3-5 on good days," said Mr Gharpure, the general manager at
the dealership.Mr Gharpure's experience is not an isolated one
Across India dealerships are being pushed out of business and the Indian auto sector is going through its biggest slump in nearly two
Passenger vehicle sales fell for eight straight months until June, and in May sales dropped 20.55 per cent - the sharpest recorded fall in
18 years.Preliminary data indicates passenger vehicle sales may have plunged as much as 30 per cent in July
The slump in India, along with a simultaneous slide in Chinese auto sales, is a blow for automakers wrestling with higher costs driven by
more stringent emission norms and a push to develop electric cars.Unlike in China, where the plunge in cars sales has been caused largely by
new emissions rules, India has seen a mix of factors that have combined to erode demand for automobiles.Prime Minister Narendra Modi's
2016 ban on high-value bank notes, higher tax rates under a new goods and services tax regime, a boom of ride-sharing firms such as Uber and
Ola, and a weak rural economy have all played a role.But many dealers and automakers agree it is a deepening liquidity crunch among shadow
banks that has been the biggest single factor in an auto sales collapse, which some fear may lead to more than a million job
losses.Non-banking finance companies (NBFCs), or shadow banks, have dramatically slashed lending following the collapse of one of the
biggest, IL-FS, in late 2018.IL-FS, or Infrastructure Leasing - Financial Services Ltd, was a behemoth in shadow banking and its defaults
and unravelling, amid fraud allegations, have dried up funding for rivals and led to a surge in their borrowing costs.Non-bank or shadow
banking firms generate credit outside traditional lenders, by means such as collective investment vehicles, broker-dealers or funds that
invest in bonds and money markets.In India, NBFCs have in recent years helped fund nearly 55-60 per cent of commercial vehicles both new and
used, 30 per cent of passenger cars and nearly 65 per cent of the two-wheelers in the country, according to rating agency ICRA.To aggravate
matters, the stress in the auto market has also prompted banks to begin trimming their exposure to the sector."The car doesn't sell, it's
the finance that sells," said R Vijayaraghavan, a senior marketing consultant at the same Mumbai dealership
"Today the finance is not selling, so the cars are not selling."Problems amplifiedSome 286 dealerships have shut down in the last 18 months
across the country as rising costs for inventory management have made businesses unviable, according to the Federation of Automobile Dealers
Association (FADA), a lobby group of auto dealers."The slowdown in the (NBFC) sector has dragged down vehicle sales growth," said AM
Karthik, financial sector head at ICRA
"Now the auto slowdown is becoming more visible as the liquidity squeeze continues."Automakers including Maruti Suzuki, Tata Motors, and
Mahindra - Mahindra are feeling the heat and have either cut production or temporarily closed plants to correct mounting stocks.According to
FADA data, passenger vehicle inventories now stand at 50-60 days up from around 45 days earlier, while those of two-wheelers are even higher
For commercial vehicles, inventory levels range between 45 and 50 days."We are asking dealers to maintain an inventory of 21 days, which is
almost half of the current levels," said Ashish Kale, president of FADA.At least four dealers from different brands said, however, there was
little scope to reduce inventories as automakers were pushing them to buy stock despite there being no demand even with heavy discounting
and other sops on offer.While 70-75 per cent of car sales were previously financed in-house by NBFC or bank agents sitting at a dealership,
that has fallen to about 50 per cent, say dealers, as buyers struggle to qualify under more stringent lending norms put in place by lenders
that are under pressure to shore up their books.Moreover, as many NBFCs typically lent to less creditworthy clients, banks are reticent to
rush in to fill the void, as they themselves struggle to cope with an existing pile of about $150 billion in bad loans."The banking sector
is certainly one of the factors that has affected the growth of the industry," said RC Bhargava, chair of Maruti Suzuki, noting interest
rates for car buyers have gone up in the last 12 months despite the central bank cutting rates.Early recovery unlikelyWith the auto sector
employing more than 35 million people directly and indirectly, and contributing more than 7 per cent to India's GDP and accounting for 49
per cent of its manufacturing GDP, the fallout from the auto slump is huge and presents a big challenge to Prime Minister Narendra Modi's
government as it begins its second term.The entire supply chain, from vehicle manufacturers to component makers, are bleeding amid the
slump."I've been making my payments for the last 30 years and the lenders know me," said Adarsh Gupta, the director of finance at Autolite
(India), a component manufacturing firm
"But even a two-day delay has people crying that I will default."I too want to pay, but because of the fall in cashflows I'm facing
short-term issues and because of that it's difficult to get more financing
This is the vicious cycle we are in."Still, automakers are hopeful of a recovery in the months ahead, helped by the September-December
festive season that traditionally sees a surge in consumer spending."One can only wish that things improve sooner rather than later
With festive demand starting to seep through, we should start seeing a gradual improvement in sales," said PB Balaji, group CFO at Tata
Motors.Analysts are more sceptical though, and say without vehicle financing becoming cheaper and easier the chances for that are low
With no silver lining in sight, analysts fear bad debts could mount in the auto sector, forcing banks to further reduce their exposure."We
see market prices and sales coming down so there may be issues," said a top official at the Indian Banks' Association
"We could see a spillover in terms of bad loans for the overall sector, but we are going to wait and watch."Dealers said they were hopeful
of tiding over the current downturn as the broader growth story for India remains intact, but there could be a lot more pain before a
recovery kicks in."The future is going to be multi-brand car showrooms," said marketing consultant Mr Vijayaraghavan
"That is the only way for dealerships to survive going forward as overhead costs need to be shared."Get Breaking news, live coverage, and
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