lenders: soaring fuel prices and falling charges signal stress for CV lenders

Mumbai: The optimism of truck financiers after the reopening of the economy appears to have been short-lived, with the last month seeing a sharp drop in capacity utilization amid soaring prices.

In March, the operating profile of several borrowers deteriorated, reducing their ability to generate excess cash flow. Commercial vehicle (CV) financiers are expected to face a sharp rise in bad assets and a reshaping of loans.

“Asset quality has deteriorated for most of the large VC financials with significant delinquencies and portfolio restructuring,” said R Srinivasan, vice president – financial sector ratings at ICRA. “Downside risks emanating from fuel prices remain a key driver for CV operators in the near term. Given the levels of capacity utilization and freight rates seen in fiscal year 2022, the economy used vehicles are better than new vehicles from a financial point of view.”

According to an analysis by ICRA, diesel costs have increased by more than 50% in the past two years and could increase by another 5-15% in the near future. Fleet operators would need to pass on at least 45-65% of the additional fuel costs to be able to meet their EMI service obligations. Due to mounting pressures on asset quality, ICRA expects the CV of non-bank lenders to increase by 7-9% in the current fiscal year.

“For vehicle financiers, although the cost of borrowing has not yet started to rise due to the benefits of repricing higher-cost liabilities, mixed returns have come under slight pressure, due to the loan portfolio We expect a minor squeeze in normalized margins for vehicle financiers,” said Abhijit Tibrewal, analyst at Motilal Oswal.

Between April 2020 and February 2022, fuel and freight rates increased by 29% and 43% respectively. According to national brokerage firm ICICI Securities, assuming a 25% increase in fuel prices, freight rates could increase by 12%.

“Signs of cyclical recovery are being challenged by rising input costs, particularly fuel, and this rise is testing demand and portfolio quality for vehicle financiers,” said analyst Ansuman Deb. at ICICI Securities.

Commercial vehicle financiers have been one of the hardest hit segments since the start of the pandemic. Borrowers have faced problems with a drop in load availability and a sharp increase in fuel prices. These external factors deteriorated the operating environment and severely affected their ability to generate excess cash flow. These lenders are estimated to have grown their assets under management (AUM) at a slower pace of around 2.5% in the nine months of the past fiscal year.

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