Car dealers feel the load as sales slow, inventory piles up

Mumbai: Passenger vehicle makers have approached auto financiers requesting them to extend the credit cycle for dealers to 90 days from 60 at present, indicating the pressure building up in the retail channels amid slowing sales, which is leading to stock piling up at car dealers.

This trend was last seen in FY19, said multiple auto financiers and dealers ET spoke with on the sidelines of the third Annual Finance & Insurance Summit of Federation of Automobile Dealers Associations (FADA).

But, dealers said the extension in the number of credit days will not help. On the contrary, it will add to the financial burden due to a higher interest cost outgo. On an average, stock levels across the sales channels have gone up to 55-60 days against the norm of 30 days for this time of the year.

“There is a lot of demand to extend the credit cycle (tranche period for inventory funding) for dealers. We are getting requests especially from large carmakers like Maruti Suzuki and Hyundai Motor India to extend the credit cycle from the current 60 days to 90 days,” said Akhilesh Roy, business head-auto loan and inventory funding at HDFC Bank.

Automakers in India follow the ‘cash and carry’ model. Dealers seek loans from commercial banks and non-banking financial companies (NBFCs) to purchase stock from the manufacturers for a period of 45-60 days at a rate of 7.5% to 9.25%, depending on the dealership’s credit history and overall standing. The number of days is referred to as the tranche period.

While it’s not very comfortable for the banks to increase the tranche period, they are considering it depending on the dealer’s vintage, balance sheet size and visibility on the stock a particular dealer is carrying, said Roy.

Debasish Kar, business head-auto sector loans at Mahindra & Mahindra Financial Services, confirmed the trend. “There’s clearly a pressure and there’s a request to extend the credit period,” said Kar. To be sure, a higher number of variants for each model also means that a dealer needs to be well capitalised, said Kar.

Citing an instance of Mahindra’s recently launched 3XO, a compact SUV that has eight variants, he said averaging at a minimum of ₹9 lakh each, the dealer will need ₹72 lakh just for one model. “One never knows which variant will be asked for. As a dealer, you need to stock all,” he said. While he does expect the overall demand scenario to improve, this month and the next two months when sales slowdown due to the monsoon will be tough. Other financiers also flagged rising inventory concerns at the summit.

However, Partho Banerjee, head of sales and marketing at car market leader Maruti Suzuki India, said there’s not much to be read into. “It’s a facility provided by the finance companies. Just like home loan solutions, they do come with innovative financial solutions for dealers as well. It’s not a compulsion for any dealer to take the extension. They can pay back the money in 30 days too.” He said Maruti had a stock of 37 days on an average in the beginning of June. The norm is 30-31 days and its excess by a week or so.

Hyundai Motor India spokesperson didn’t respond to ET’s queries.

“We don’t mind carrying the stock if the interest cost for the extended days is paid by the manufacturers,” FADA president Manish Raj Singhania said. “To keep their dealer-partners healthy, the manufacturers should either buy out the interest cost or not saddle them with excess stock. You can’t stretch beyond a point.”

Singhania doesn’t see the sales turning the corner any time soon and fears that a forecast of a better-than-normal monsoon means high possibility of floods, which can again hamper sales.

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