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Event update: Automobiles - NBFC Regulations-A Potential bugbear

Automobile volumes could see an adverse impact if RBI were to adopt measures to regulate the Asset Liability Management (ALM) of NBFCs, as per its policy statement.  We believe while measures by RBI to stabilize the liquidity of NBFCs (a stress point recently) could reduce the lending volatility in the automobile sector over the long run, the same could lower financing funds and consequently tighten lending norms for the sector in the near to medium term. The tightening comes at a time when reports (Fitch) suggest rising early delinquencies in the CV space. Our analysis of the pattern of NBFC financing suggests that the impact could be highest on CVs/tractors/3Ws with PVs seeing the least impact. We see a potential negative for Ashok Leyland, Tata Motors (TTMT; CV players) and M&M.

NBFCs have a large share in CVs/ least in cars: Our discussions with the industry suggest that NBFC’s financed nearly 70% of CV sold, 38% of tractor sales, 28% of 2W volumes and just about 19% of PV sales. Excluding the captive NBFCs, we estimate the proportion at 30% for CVs, 14% for 2Ws and 11% for PVs. Also, the loan to value tends to be the highest for CVs (over 90%) while the same is markedly lower at 65%-75% for both PVs and 2Ws. As a result, any tightening in lending norms by NBFCs (due to asset quality or liquidity issues) could have a bearing on CVs/tractors, with PVs the least affected, in our view.

Banks unlikely to replace NBFC in auto financing: It is noteworthy that NBFCs tend to finance relatively high-risk customers with weak credit profiles or service in rural areas, where banks have limited reach. For instance, apart from first time users (FTU), NBFCs finance even small fleet operators (SFO) within CVs. In contrast, banks primarily finance large fleet operators (LFO) and also have a higher market share (~75%) compared to NBFCs in the PV space. This is because PVs are largely an urban/semi urban phenomenon with a typically stronger credit profile. The lending pattern broadly complements the fact that CVs have the highest GNPAs compared to PVs, which has the least. Given that banks and NBFCs largely have different sets of customers, we believe it is unlikely that banks would bridge any funding gap left by NBFCs in the auto space.

Rising automobile loan tenures add to concerns: Our discussions with the industry suggest that automobile loan tenures have shown an uptick in last few years, with the average loan tenure for automobiles having increased meaningfully from about 3 years in FY10 to an estimated average ~4 years for PVs and 2Ws and ~5 years for CVs. While the probability of an ALM mismatch arising from the automobile book is lower than say, housing loans, nonetheless it still could be long enough to be impacted by any new norms.

Overview – another negative for the sector:  In case the regulatory concerns lead to a tightening in lending norms by NBFCs, it could add to existing near-term pressure points on the sector (higher fuel prices/interest rates/weak monsoons). We expect CV players to feel the maximum impact of the potential new measures, with PVs the least affected. We maintain a cautious stance on the CV cycle () with a Neutral rating on Ashok Leyland and TTMT.