Banks tie up with automakers to curb fund diversion by dealers

Through much of the second half of 2019, large banks had frozen disbursements to auto dealers and tightened terms for them to access loans.

By: | Updated: January 9, 2020 10:24 AM

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Having first tightened terms for loans to auto dealers, banks have now opted for coordination with manufacturers to detect and prevent diversion of funds by dealers. In some cases, they have carried out system integration with original equipment manufacturers (OEMs).

Through much of the second half of 2019, large banks had frozen disbursements to auto dealers and tightened terms for them to access loans. While the build-up of excess inventory was one reason behind the trend, suspicions of fund diversion (now largely confirmed) also played a role.

To ensure loans are utilised for funding inventory, Axis Bank is working closely with most of the large OEMs. Ganesh Sankaran, group executive - wholesale banking coverage group, Axis Bank, said that generally, these manufacturers help the bank by closely tracking the inventory at the dealers and intimating the bank in a timely manner for liquidating inventory finance. “We have also entered into system integration with some anchors to enable vehicle identification number-based financing that notifies the bank as soon as a vehicle is sold, thereby helping in avoiding diversion. Better inventory monitoring will go a long way towards easing financing for the sector,” Sankaran said.

Recently, Federal Bank entered into an agreement with Maruti Suzuki India to offer financing options to both customers and dealer-partners of the carmaker. The bank said it would be putting in place mechanisms to efficiently track end use of funds given to dealers. Shyam Srinivasan, managing director and chief executive officer, Federal Bank, said that some dealers may have been diverting funds released to them for acquiring inventory. “The real nuance of managing credit risk in dealer financing lies in tracking inventory and fraud, which can be done using end-to-end digital systems,” he said.

At the same time, lenders have also begun to coordinate better with OEMs to track the movement of inventory. Axis Bank’s Sankaran said: “We continue to manage the portfolio on a regular basis and it also ensures that anchor recommendations are considered before any new on-boardings. Further, an anchor typically gives a stop-supply comfort to help banks enforce financial discipline.”

A senior executive with a large public sector bank (PSB) said that the decision to tighten lending norms for inventory funding had also helped take care of excess inventory build-up. “Last year, we had to put in stricter terms because some OEMs were pushing inventory to dealerships even when retail sales were not happening,” he said, adding that the situation of excess inventory came under control as a result of tighter lending conditions.

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