Lenders lean on used car financing as chip shortage fears resurface

According to financial sector analysts, the ongoing conflict between Russia and Ukraine could reignite problems related to the supply of semiconductor chips.

Banks and non-bank financiers active in the auto finance market are counting on the used vehicle segment to drive growth in the current quarter. According to analysts who follow the financial sector, the ongoing conflict between Russia and Ukraine could reignite problems related to the supply of semiconductor chips and affect the supply of new vehicles.

Auto finance was already lagging behind in the consumer lending universe even before Russia launched military action against its neighbour. According to sectoral data released by the Reserve Bank of India (RBI), the outstanding auto loans of banks increased by only 2.5% YoY (YOY) in January 2022 to reach 2.81 lakh crore as of January 28. Overall personal loan growth held steady at 11.6% in the same month.

Industry watchers attribute the subdued trend in vehicle financing to Covid-induced disruptions, lower availability of cars and utility vehicles (UVs) as well as continued weakness in the two-wheeler, tractor and vehicle segments utilities (CV). In a recent note, Emkay Global Financial Services said – citing bankers – that the ongoing geopolitical crisis has raised new concerns about semiconductor supply and vehicle availability. However, the supply of new vehicles had improved during the holiday season.

“As a result, few financiers have ventured into used car financing for volume and better returns…some caution might be seen among short-term bankers in case a protracted conflict between Russia and Ukraine could result in higher fuel prices or business disruption,” Emkay analysts said.

Motilal Oswal Financial Services, in a report dated March 16, said used vehicles across all product categories continue to show strong demand momentum. “The price of used vehicles has increased by 8 to 12%, due to higher prices for BS-VI vehicles and contributes to the higher value of disbursements,” the brokerage said, adding that demand new CV and commercial equipment (CE) remains low. .

Some analysts attributed weak demand for new vehicles to rising consumer prices. In a March 14 report, Nomura analysts pointed to the risk of a slowdown in mass consumer segments due to rising inflation. Fuel prices are expected 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. “Another concern is consumer sentiment due to factors such as declining economic growth and rising inflation,” Nomura analysts added.

Consumer price index (CPI) inflation jumped to 6.07% in February 2022 from 6.01% in January. The central government is believed to have refrained from raising fuel excise duties ahead of five state assembly elections, but price hikes are now widely expected.

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