Automobile dealers in India are worried that some of them may be forced to default as banks have started pressing them to repay dues after the six-month loan moratorium ended on 31 August amid tepid vehicle sales.
With insufficient cash flows and fixed overheads, dealers have expressed their inability to clear their dues immediately.
According to three auto dealers, some banks have already started asking for more collateral for granting further extension or restructuring of dues. For some dealers, the banks have even debited their entire pending interest amount in the first week of September.
The stringent lockdown aimed at curbing the covid pandemic has strained the finances of dealers. Most continued to incur fixed costs like rent and salaries, though sales remained weak even after lifting of the lockdown in May. Several dealers Mint spoke to said it will be impossible for them to pay the pending interest in one go and have asked banks to deduct the amount over a period of six months or more as auto sales are expected to recover by then.
Vinkesh Gulati, president of Federation of Automobile Dealers Associations (Fada), said it will not be possible for many dealers to pay their entire dues to banks immediately as their businesses have suffered heavily.
“Banks should restructure loans under less stringent conditions and let dealers pay on a monthly basis. In the past few months, most dealers went into working capital negative. Retail sales have also not recovered substantially, and only wholesale has improved in expectation of good sales during the festive season,” he said.
Due to subdued sales in the past two years, more than 300 dealerships have closed, and some are in the process of winding up as the covid-19 related economic downturn has worsened their finances.
According to a passenger vehicle dealer in Hyderabad, banks are well within their rights to seek pending amount as per guidelines set by the Reserve Bank of India, but most dealers had to use the funds available to meet fixed costs in the past few months.
“Most dealers managed to clear their inventory by July as retail sales picked up gradually post lockdown. So, technically they should be able to pay back; but due to the pandemic, a lot of them had to use the short-term funds from the banks to pay employees and pay rent. Also, for restructuring, banks are looking at certain financial ratios in February when balance sheets of dealers were already stretched,” said the person, requesting anonymity.
Bankers said that like other stressed borrowers, automobile dealers also have the option of debt recast, as permitted by the central bank. To that extent, lenders are assessing accounts on the basis of eligibility prescribed by the Kamath committee last week.
“As per RBI directions, we are telling working capital borrowers that their unpaid interest will be converted into a funded interest term loan, which they can repay in instalments till March 2021. Some of them will have difficulties in servicing loans suddenly from September after a prolonged moratorium, however, they need to approach banks as soon as possible for us to take things forward,” a banker said, seeking anonymity.