ICRA expects recovery for NBFC PV credit in FY2022
Given the slowdown in the passenger vehicle (PV) segment along with Covid induced disruption, Foreign PV NBFC Captives (FOC) credit contracted by 8% Y-o-Y in FY2020 and-further dipped by 4% YTD in H1 FY2021, according to ICRA Ltd’s market analysis on 10 Feb 2021.
FOCs are an important constituent of PV financing among NBFCs. Captive financing provides a competitive edge, especially in the luxury car segment, by offering low-cost credit and innovative financing models. It also plays an important role in inventory and long-term financing for dealerships, which supports the dealer’s financial flexibility owing to the relatively low sales volume of foreign OEMs in India
“The challenging macroeconomic environment, the Covid-19 pandemic-related lockdown as well as the overall slowdown in the PV segment along with the cautious stance of FOCs towards wholesale lending led to a contraction in FOC credit in FY2020 and H1FY2021,” said Manushree Saggar, Vice President and Head – Financial Sector Ratings, ICRA.
However, ICRA expects recovery for NBFC PV credit in FY2022 with an expected credit growth of 3-5% Y-o-Y. While market share of FOCs is expected to remain low in the overall NBFC PV credit, growth may look optically higher for FOCs due to low base, said Saggar.
As per ICRA estimates, FOCs accounted for around 22% of NBFC PV credit as on 30 September 2020. With a relatively higher contraction in luxury car volumes compared to overall PV sales, the share of FOCs declined to 22% of NBFC PV credit as on 30 September 2020 from 25% as on 31 March 2019.
In terms of portfolio mix, these FOCs are majorly retail focussed and share of dealer/channel financing has gradually been declining over the years as FOCs became more cautious amid rising delinquencies in the dealer segment.
As for asset quality, 90+ days past due (dpd) for FOCs have been deteriorating over the past few years owing to slippages in the wholesale portfolio and the gradual seasoning of the retail loan book and these FOCs reported a 90+ dpd of 5.8% as on 30 September 2020, up from 4.3% as on 31 March 2019. The ability to undertake recoveries, especially in the wholesale book, would be crucial for FOCs to improve their asset quality going forward.
The yields of FOCs are lower than the overall NBFC sector, given the highly competitive market and target segment. At the same time, they have access to funds at competitive rates supported by their respective group’s established relationships, umbrella limits from foreign banks and high credit ratings, supported by their parentage.
Operating expenses are also moderate for FOCs due to their relatively lean structure as well as the synergistic benefits arising from their operational linkages with the OEMs.
Credit costs, which were traditionally lower for FOCs, witnessed an uptick in recent years. Consequently, the profitability indicators moderated significantly in FY2020 with some entities reporting net losses.
“The profitability of FOCs is likely to remain subdued over the medium term (return on average assets <1.0%), given the moderate growth and elevated credit costs amid asset quality challenges. Keeping the credit costs under control, especially in the dealer finance book, would be key for FOCs to improve their profitability and return indicators,” said Neha Kadiyan, Senior Analyst – Financial Sector Ratings, ICRA. #banking #credit #VCs #investment #financing /fiinews.com
