Lenders lean on used-car financing as chip shortage fears resurface

According to analysts from financial sector, the ongoing conflict between Russia and Ukraine may rekindle issues related to the supply of semiconductor chips.

Lenders lean on used-car financing as chip shortage fears resurface
The Indian economy is experiencing spillovers from the Russia-Ukraine conflict as it recovers from the third wave of the pandemic, the report said.

Banks and non-bank financiers active in the vehicle finance market are relying on the used-vehicle segment to drive growth in the current quarter. According to analysts who track the financial sector, the ongoing conflict between Russia and Ukraine may rekindle issues related to the supply of semiconductor chips and affect the supply of new vehicles.

Vehicle finance was already a laggard in the universe of consumer loans even before Russia launched military action against its neighbour. As per sectoral data released by the Reserve Bank of India (RBI), outstanding vehicle loans from banks grew just 2.5% year-on-year (y-o-y) in January 2022 to `2.81 lakh crore as of January 28. Overall retail loan growth stood at 11.6% during the same month.

Sector watchers attribute the muted trend in vehicle finance to Covid-led disruptions, lower availability of cars and utility vehicles (UVs) as also persistent weakness in the two-wheeler, tractor and commercial vehicle (CV) segments. In a recent note, Emkay Global Financial Services said — citing bankers — that the ongoing geopolitical crisis has raised fresh concerns around supplies of semiconductors and vehicle availability. However, the supply of fresh vehicles had improved during the festive season.

“As a result, few financiers have ventured into used-car financing to garner volume and better yields…some caution could be seen among bankers in the near-term in case a prolonged Russia-Ukraine conflict could lead to fuel price hikes or business disruption,” analysts at Emkay said.

Motilal Oswal Financial Services in a report dated March 16 said that used vehicles across product categories continue to demonstrate strong demand momentum. “Pricing of used vehicles has increased 8-12% led by higher prices of BS-VI vehicles and is aiding the higher value of disbursements,” the broking firm said, adding that the demand for new CVs and commercial equipment (CE) remains weak.

Some analysts have attributed the weak demand for new vehicles to rising consumer prices. In a March 14 report, analysts of Nomura highlighted the risk of a slowdown in mass consumption segments due to rising inflation. Fuel prices are likely to rise further and there could be a 2-3% increase in customer cost of ownership for every `10 increase in fuel prices, they said. “Further concern is on consumption sentiment due to factors like lower economic growth and rise in inflation,” analysts at Nomura further said.

Consumer price index (CPI) inflation surged to 6.07% in February 2022 from 6.01% in January. The central government is believed to have been holding off from hiking excise duties on fuel ahead of elections to five state assemblies, but price hikes are now widely expected.

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