Many companies in India have been making structural changes to strengthen their funding and liquidity since the crisis that followed the IL&FS default.
Heavy reliance on short-term wholesale funding and thin liquidity pose common risks for Indian vehicle finance companies. Vehicle finance companies in India are among the fastest growing in Asia, benefiting from favourable economic and demographic conditions, although vehicle sales are slowing as economic conditions worsen. The risk is highlighted by the IL&FS default that sparked a liquidity crisis for the entire non-bank finance sector in India, said Moody’s in its comparative analysis on vehicle financing in India and Indonesia.
Many companies in India have been making structural changes to strengthen their funding and liquidity since the crisis that followed the IL&FS default. They are reducing exposure to short-term funding sources, such as commercial paper, while lengthening the durations of liabilities. They are also tapping the securitisation market to obtain additional liquidity and raising their stocks of liquid assets, Moody’s said.
During normal times, these companies generally can avoid a liquidity crunch by generating steady cash flow from loan repayments while refinancing debt without much difficulty. However, when macroeconomic conditions deteriorate rapidly or market liquidity tightens substantially, companies can quickly have trouble refinancing and face liquidity stress, as seen in India, where NBFCs grappled with a sharp tightening of short-term capital markets caused by a default by IL&FS, a major infrastructure finance company, in September 2018, Moody’s said.
Many Indian lenders have diversified into other businesses, such as home equity financing and business lending, which carry lower rates than any type of vehicle finance and suppress their overall asset yields.
Unlike Indonesia, banks in India collectively continue to hold a majority share of the vehicle finance market, although NBFCs’ share has been steadily expanding amid strong growth in semi-urban and rural areas, driven by government initiatives to support economic and infrastructure development in rural regions.