New Delhi:Banks are taking a cautious approach to lending to smaller automotive parts makers, fearing companies may default on repayments as was the case with Amtek Auto, three people aware of the development said, requesting anonymity.

Banks have told the companies that in case of a default of delay in payment the personal account of the promoter with the same bank will be used for recovery, a top executive of a leading auto parts maker, the first of the three people cited above, said, requesting anonymity.

Two suppliers of Honda Motorcycles and Scooters Ltd approached two leading banks for extra credit since they had received a bigger order from the Japanese company but the banks sought more collateral which the company could not provide, said another top executive of auto component manufacturer, declining to name the banks or the suppliers involved.

The decision to scrap the issuance of the letters of undertaking (LoUs) and buyer’s credit by the Reserve Bank of India (RBI) has further hurt these companies. Most of the component makers importing raw materials to India used to avail buyer’s credit from the banks for their foreign currency transactions since that would give them a window of three-to-six months to make payments as and when exchange rates became favourable.

As this option is not available any more, companies will have to spend more to import raw materials.

Manish Dhariwal, chief financial officer of PPAP Automotive, a supplier to most leading passenger vehicle manufacturers, said that the companies may find it difficult to comply with the stricter terms being introduced by banks in order to reduce the risk of bad loans and this would adversely effect the investments being planned for genuine business expansion.

“The stronger companies may in turn find it lucrative to go for alternative options such as commercial papers or bonds which are directly subscribed by mutual funds and other investors which would reduce the good loan book of the banks." Dhariwal said.

A top executive of a two-wheeler component maker, the second of the three people cited above, said that growth in the industry is due to just three or four players, which is why a lot of companies are not increasing capital expenditure. Otherwise, given the attitude of the banks, it would have been difficult to raise funds.

Companies such as Maruti Suzuki, Honda Motorcycles and Scooters, Tata Motors and Ashok Leyland have been asking some of their component manufacturers to ramp up facilities as demand till 2020 is expected to remain robust.

Amtek Auto, one of the largest component manufacturers in India, could not repay a total debt of around 14,074 crore to its lenders and was taken to the bankruptcy court by its lead bank State Bank of India (SBI). It was one of the 12 companies referred by the Reserve Bank of India for bankruptcy proceedings.

A senior executive of a public sector bank, not one of the three people cited above, told Mint that there is a lot of uncertainty associated with the auto ancillary firm since they are mostly dependent on the big manufacturers such as Tata Motors Ltd or Maruti Suzuki.

“Banks have to check whether the extra order is because of seasonal thrust in demand or there is a long term plant. If it is short term then the banks have to cautious as these companies do not have the cash flow to withstand any volatility. I think companies with good cash flow would never have any such problem," the banker said, asking not to be identified by name.

A spokesperson for ICICI Bank said that the bank continues to fund auto-ancillaries based on the credit evaluation of each case. The bank has not made any specific changes in credit decision parameters for this segment of companies.

Vinnie Mehta, director general of the Automotive Component Manufacturers Association, said that availability of credit from banks is a huge concern for automotive component manufacturers as most of these companies look at bonds or commercial papers to raise funds and not all of them have a good rating.

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