Mumbai: Higher cost of finance, slower economic growth and shrinking industrial production haven’t deterred truck buyers from seeking finance for purchasing new vehicles.
Truck and bus sales—a key barometer of a country’s economic health—expanded by a record 35% to 66,264 in November, according to data released by the Society of Indian Automobile Manufacturers, or Siam, on Thursday.
This is despite the sector’s high dependence on financing; almost all trucks sold in the country are bought on credit. This makes the sales of trucks more vulnerable to changes in interest rates.
Lending rates for commercial vehicle loans went up by 100-150 basis points (or 1-1.5 percentage points) in the past year to 14-16%, on the back of a series of policy rate hikes by the Reserve Bank of India (RBI), according to financiers.
But if the growth in loans and its quality are any indication, the negative macroeconomic factors haven’t dimmed buying sentiment so far.
Truck and bus sales expanded 20% year-on-year to 499,965 units between April and November, according to Siam.
Outstanding bank loans to transport operators as on 21 October was Rs66,710 crore, compared with Rs56,200 crore a year ago, RBI data shows.
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The buoyancy has surprised even commercial vehicle makers. “We always thought commercial vehicles and not cars have a higher susceptibility to increase in interest rates but the current trends say something else,” Pawan Goenka, president-automotive and farm equipment sector, Mahindra and Mahindra Ltd, told reporters at a press briefing on Wednesday.
Passenger cars sales—about 70% of which are bought on credit—declined 0.5% to 1.5 million units in April-November, according to Siam.
Executives at financing firms attribute the strong growth in truck sales to freight rates that have remained strong and helped transporters use their fleets optimally.
“We haven’t seen either the freight movement or rates coming down, which is why the earning capability of the transporters hasn’t been impacted despite the negative factors,” said Shyam Mani, managing director at Tata Motorfinance Ltd, or TMFL, the vehicle financing arm of Tata Motors Ltd and which finances close to 17% of the new trucks sold in the country. Tata Motors is the country’s largest truck maker by sales.
Monthly loan repayments are satisfactory and there have been no defaults, said Mani.
Over the past three years, TMFL’s gross non-performing assets, or bad loans, have come off to 4.91% from 9.94%. Its loan book is about Rs12,660 crore and growing at 30% year-on-year.
S.V. Parthasarathy, head of the consumer finance division at IndusInd Bank Ltd, said non-performing loans have come down also because banks refer to data from Credit Information Bureau of India Ltd, or Cibil, the country’s largest aggregator of information on borrowers.
“Cibil has helped in risk assessment, but the fact that freight movement has remained strong owing to good monsoon, and particularly since the advent of the festive season, has helped,” he said.
IndusInd’s loan book has grown 40% this year, higher than the 30% growth it saw last year. The bank mostly finances new vehicles and has a loan portfolio of Rs14,500 crore.
The sustained buoyancy is indicative of the improved health of transporters despite a decelerating economy and rising inflation, said Mahantesh Sabarad, senior analyst at Fortune Equity Brokers Ltd.
Deepak Mohanty, vice-president at HDFC Bank Ltd’s transportation division, said many manufacturers are opting for new trucks to replace older ones because of stringent pollution control norms in several states.
Strong demand for tippers for road construction projects across the country has offset slowing demand from Goa, Karnataka and Orissa following a mining ban.
Other experts, however, say the buoyancy will be short-lived and are taking pre-emptive measures.
“The operators are feeling the pressure on margins as the freight rates haven't increased. Going forward, things may get difficult,” said Umesh Revankar, deputy managing director at Shriram Transport Finance Co. Ltd, which mostly finances the purchase of used vehicles.
In anticipation of the market slowing soon, Shriram has increased its loan-to-value ratio, or the money to be paid upfront, by 5 percentage pointsto 35%.
“With the economy slowing down, vehicle demand may get impacted adversely, affecting its resale value,” said Revankar.
Shriram Transport Finance has outstanding loans of Rs28,000 crore towards financing the purchase of used vehicles, and Rs10,000 crore for new ones.