Default on commercial vehicle loans to hit banking sector

The stress on the banks’ asset quality could be seen with a lag because 
defaults are noted after commercial vehicle operators are not able to service
 loans for more than 90 days. Photo: Hemant Mishra/Mint
Live Mint : Krishna Merchant :Thu, Apr 11 2013. 12 04 PM IST

A good chunk of such loans is at risk because fleet operators are struggling to repay debt as economy stutters

Commercial vehicle loans are the new front in asset-quality problems for banks. Industry estimates put loans against commercial vehicles at Rs.60,000 crore.

 A good chunk of this is at risk because fleet operators are struggling to repay debt as the economy continues to stutter.

According to Crisil Research, the monthly collection ratio of a securitized pool of commercial vehicle loans amounting to Rs.17,700 crore fell to a four-year low of 94.4% in the December quarter from 96.2% a year ago. This trend is likely to be reflected on the non-rated portfolio of commercial vehicle loans in the country as well.

Freight demand has taken a hit due to lower growth in production of industrial goods. The tepid demand meant that truck operators were unable to pass on the increase in diesel prices. Truck rentals slipped 1.5-3% in March and were down around 8% for the just-ended fiscal year, according to data compiled by Indian Foundation of Transport Research and Training. That has put truckers’ debt servicing ability under a lot of pressure.

To be sure, credit to transport operators has slowed drastically—6% year-on-year growth in February compared with 16.9% a year ago—but they could soon start defaulting on loans if there is no recovery in sight.

The stress on the banks’ asset quality could be seen with a lag because defaults are noted after commercial vehicle operators are not able to service loans for more than 90 days. The proportion of loans that are not paid for more than three months have increased by 100 basis points, said Crisil Research. Defaults by transport operators could rise beyond six months, leading to a potential rise in non-performing assets, according to Crisil.

While banks can repossess and sell the vehicles of defaulters, it does lead to a certain amount of write-off since the resale value of trucks is declining. Although the banking sector’s overall exposure to commercial vehicles is around 1.5%, it will weigh on banks and non-banking financial companies that have high exposure to truck operators. Truck loans make up 7% of the total loans for HDFC Bank Ltdand ICICI Bank Ltd, according to estimates by Emkay Global Financial Services Ltd. For IndusInd Bank Ltd, it is 17% of total loans, 13% for Mahindra and Mahindra Financial Services Ltd and 33% for Shriram Transport Finance Co. Ltd, according to the brokerage.