Delinquencies in commercial vehicle loans may rise in the near term as demonetization just adds to the list of existing problems in the sector.

For instance, weak truck rentals have been a concern.

A report by Crisil Research says that in the first half of the current fiscal, demand tapered amid weak industrial output and consumption demand.

Truck operators were unable to offset the hike in diesel prices, as there was surplus fleet availability.

Hence, there has been a cautious approach to replacements and fleet augmentation.

As such, medium and heavy commercial vehicle (M&HCV) sales took a tailspin after heady growth rates in FY15 and FY16. The economic slowdown, and a delay in pick-up of industrial and real estate activity has had a cascading effect on M&HCV sales.

September quarter sales have been worrisome with a 20% year-on-year (yoy) decline. But for the tipper segment, which depends on infrastructure activity that has been picking up, the sales contraction would have been more severe.

Stocks of Tata Motors Ltd and Ashok Leyland Ltd have been sliding down after delivering robust returns between April 2014 and March 2016.

And now, the problem could be fuelled by the demonetization impact that has constrained cash flows in the economy. The acute shortage of cash-in-hand for commercial vehicle operators is likely to hamper the ability to pay principal and interest on their vehicle loans at least in the immediate few months. So, loan repayments will depend on how quickly the liquidity constraint eases.

Loan repayment defaults beyond 90 days on new and used CVs had scaled a peak of 18.3% and 9.5%, respectively, in October 2014. But, it had improved to 11.2% and 6.7% by March 2016, according to a report by Moody’s Investors’ Service. But things will now get worse.

The Moody’s Investors’ Service report says that until normal economic activity is restored, delinquencies on CV loans will rise in the near term. But it should come back to the current levels during 2017, supported by economic growth and low oil prices.

The potent combination of several negative forces is likely to keep CV sales suppressed and make them volatile for the next three to four quarters.

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