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The substantial focus on the rural economy in the  ₹20 trillion economic package also bodes well for lenders. (Photo: Pradeep Gaur/Mint)
The substantial focus on the rural economy in the 20 trillion economic package also bodes well for lenders. (Photo: Pradeep Gaur/Mint)

Lenders look to pivot to tractor financing to beat slowdown in the auto sector

An excellent rabi harvest and the forecast of a normal monsoon augur well for the industry, say tractor makers

Lenders are likely to sharpen their focus on financing tractor sales rather than automobiles, encouraged by a good rabi crop and burgeoning water reservoir levels, said executives from leading farm equipment manufacturers International Tractors Ltd (ITL), Escorts Ltd and John Deere India Pvt. Ltd.

The push towards tractor financing comes as the outlook for automobile sales remains bleak because of the pandemic-induced countrywide lockdown and the economic slowdown that ensued.

According to industry body Society of Indian Automobile Manufacturers, auto sales are expected to be 35-40% lower in FY21, if gross domestic product growth remains flat.

The dip in tractor sales, however, is expected to be a relatively benign 10% this fiscal, according to a report by brokerage firm Emkay Research.

“I am not worried about tractor financing because I see banks, which are active in this industry, are trying to bounce back. The private banks and NBFCs (non-banking financial companies) are increasing their rural portfolio with more budget allocation to tractors than other industries, for example automobiles," Raman Mittal, executive director at ITL, which makes Sonalika tractors, told Mint on 17 May over the telephone.

Mittal added that there are about 20 financial institutions that actively lend to the farm equipment industry, which sells 700,00-750,000 tractors a year in the domestic market.

Tractor manufacturers believe that while a substantial part of sales was lost due to the lockdown, the next quarter will see a strong recovery.

According to Shenu Agarwal, chief executive officer, Escorts Agri Machinery, the tractor industry has lost up to 80,000 units in sales during the nationwide lockdown that began on 25 March.

However, he believes that up to 50% of that would be recovered during the July-October period on the back of pent-up demand, strong enquiries, a good sowing season, full water reservoirs and a predicted good monsoon.

“We continue to see good demand for tractors due to excellent rabi harvest, good reservoir levels, forecast of a normal monsoon, along with the government’s focus on the agri sector, related to mechanization, liquidity, infrastructure and market linkages. Increase in rural and agri-spending on core schemes by the government should augur well for the industry," said Hemant Sikka, president, farm equipment sector at Mahindra & Mahindra Ltd.

Agricultural activities being largely exempt from lockdown restrictions and rural India seeing fewer covid-19 cases, the rural economy has been able to open up earlier than cities, thus allowing financial institutions to get back to work, making tractor financing an attractive option for them to focus on.

The substantial focus on the rural economy in the 20 trillion economic package also bodes well for lenders.

“Banks began opening up after 20 April and are now running at two-thirds of their capacity and in a couple of weeks they will restore complete operations," Agarwal of Escorts said in an analysts’ call on 14 May. “Financing institutions want to increase their market share in tractor loans," he added.

The tractor financing business is also attractive for its relatively lower rate of non-repayment compared to commercial vehicles.

“Delinquencies in tractor funding do not spike as much as they do in the commercial vehicle or trucking segment. Although there can be some bumpiness in the cash flows in tractors, it is still better than lending to truck fleet operators," said Shamsher Dewan, vice-president and sector head, corporate sector ratings, Icra Ltd.

The tractor financing business is today largely dominated by NBFCs and private banks.

According to Mittal of ITL, about 80% of the lending in the farm machinery segment in the country comes from private banks and NBFCs.

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