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Credit Gap in Commercial Transportation Sector Needs Urgent Finance Assistance CV financing market is estimated to be INR 5 trillion and forms a significant percentage of the overall financial sector

By Gaurav Kumar

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India's freight sector has grown in tandem with the exponential growth in the industrial activity and consumption demand. The freight requirements in the initial decades post-independence were largely met through the rail network. However, due to the large capacity investment in the road sector relative to railways in the last few decades, roadways have become the predominant freight carrying mode.


Commercial vehicle (CV) sales in India grew by 20per cent in the financial year 2018 and 18per cent in FY 2019. Within CVs, Medium and heavy commercial vehicles ("MHCVs") sales volume grew by 13per cent during FY 2019. Sales of new light commercial vehicles ("LCVs") turned positive after shrinking during the last three years to grow by 25per cent, driven by an increase in private final consumption expenditure (PFCE).

There has been a sharp downturn in the sale numbers in the recent quarters due to the overall weakness witnessed in the economy. Given the depressed industrial activity and the initial signs of consumption slowdown, the sale of CVs is expected to remain tepid in the near term. However, given that the Indian market is transitioning into BS VI (from BS IV) from April 2020, large pre-buying demand is expected to materialise from September-October 2019.

The Infrastructure

Over the medium to long term, Government of India (GoI) has budgeted large investments – upwards of INR 1,00,000 crore - to expand the national highway network. A larger road network – especially National Highways – would correspond to faster growth in the overall Commercial Vehicle sector due to higher sales of larger tonnage vehicles given favourable unit economics, and also higher sale of Light Commercial Vehicles to meet the redistribution demand from sectors like FMCG and e-commerce.

One of the most critical factors which will enable continued growth would be funding availability. CV financing market is estimated to be INR 5 trillion and forms a significant percentage of the overall financial sector. While banks are active in this space, majority of the used vehicle finance is currently being carried out by NBFCs and the informal sector given the credit profile of the borrowers who are typically small road transport operators (SRTOs). As per the recently published Economic Survey (2019), cost of capital for the trucking sector in India is ~20per cent as compared to 6per cent in the US and this is a big constraint on the sector's profitability.

The growth of the formal finance sector hinges on the profitability of the CV finance players. The delinquencies for the overall industry was very high in CY 2017 due to demonetisation and GST related disruptions. However, there has been a noticeable decline in the NPA levels for the large NBFCs like Shriram Transport Finance Corporation, Cholamandalam Finance etc since then. As of March 2019, the Net NPA levels of the CV finance players are at multi-year lows. The credit costs in the industry have traditionally remained low given the secured nature of lending and standardisation of the recovery/vehicle repossession process.

The Might of the Sector

Given the traditionally high returns earned in the sector, the larger players are steadily increasing their branch networks away from metros and industrial regions to the hinterland of India. Also, a host of smaller NBFCs are emerging in niche geographies and are expanding their client bases. The large PE and foreign investments have gone into the sector in the recent past and hence most of the players are well capitalised to grow their books.

That said, there are near term headwinds with regards to the performance of the Commercial vehicle financiers.

Post the IL&FS default and the subsequent liquidity squeeze, many NBFCs have faced issues regarding credit availability and cost of funds. CV focused NBFCs do not have Asset Liability Mismatches and have not seen credit availability issues; however, some players have a very high proportion of their short-term funding from market borrowings which has to be replaced with bank credit. Nevertheless, all NBFCs have been impacted due to the increase in borrowing cost and this is expected to be passed on to borrowers only gradually resulting in compression on Net Interest Margins (NIM) and profitability.

Fuel costs and freight rates determine the credit quality of the borrowers in the segment and the trends in both have turned adverse recently. India experienced a benign fuel cost climate from 2015 to mid-2018 given the lower international crude prices. However, with crude prices rallying, the fuel cost has increased from H2 2018. This coupled with the slowdown in economic activity from Q3 FY 2019 has resulted in a significant impact on the small borrowers. Hence the NPA levels can be expected to increase marginally going forward.

Management of the aforementioned risks by ensuring adequate capitalisation, liquidity and stricter processes with regards to credit underwriting & vehicle repossessions will bode well for the sector. Healthy CV financing sector will also aid the long term growth of transportation in the country.

Gaurav Kumar

Co-Founder & Director, Vivriti Capital

Gaurav Kumar is the Founder and Director at Vivriti Capital, India’s first tech-enabled online marketplace offering customised debt products to institutional clients. An MBA from the Institute of Rural Management in Anand, Gaurav was one of the founding members of IFMR Capital. In his previous role before founding Vivriti Capital, he was the Chief Business Officer at IFMR Capital and CEO of IFMR Investment Adviser, providing capital market solutions to companies which impact low-income households.

In these roles, he was also responsible for building strategic partnerships with clients, business origination, undertaking credit appraisal, structuring, and strategy. He was also instrumental in building the underwriting framework for lending to sectors less exposed to institutional finance, as well as building and managing more than $7 billion worth of financing with a focus on risk management which led to a near-default-free track record for over a decade

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