The ongoing Non-banking Financial Companies (NBFCs) crisis after the fall of IL&FS has spread its wings from the financial sector to the automobile sector including makers, dealers, and buyers.
The NBFC banks generate credit outside the traditional lenders, through the collective investment vehicles, broker-dealers or through the funds that do invest in bonds and money markets.
As per the reports of the rating agency ICRA, in recent years, in India NBFCs have helped to fund nearly 55-60 percent of the commercial vehicles which include both used and new, 30 percent of passenger cars and nearly 65 percent of the two-wheelers in the nation.
With the ongoing stress in the autos market, the banks started trimming their exposure to the sector.
“In the last 18 months, some 286 dealerships have been closed in India 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 told Reuters.
“The slowdown in the (NBFC) sector has dragged down vehicle sales growth,” said A.M. Karthik, financial sector head at ICRA told Reuters. ”Now the auto slowdown is becoming more visible as the liquidity squeeze continues.”
Maruti Suzuki, Tata Motors and Mahindra & Mahindra have either closed their plants temporarily or have reduced the production in order to correct the 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 at 80-90 days. 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 told Reuters.
The autos sector contributes more than 7 percent of the country’s Gross Domestic Product (GDP). The sector has more than 35 million people employed directly or indirectly. The autos sector also contributes 49 percent of its manufacturing to the GDP of the country.
The downfall in the sector is the biggest concern for the current government and immediate steps need to be taken to take a hold on it.