Since December 2021, a certain section of Indian auto financiers has been racing against time. Specifically, auto financiers backed by vehicle manufacturers such as Tata Motors Finance (TMF), Hero FinCorp, Mahindra and Mahindra Financial Services, among others. And the reason was the corrective framework guidelines for non-bank lenders issued by the country’s central bank, the Reserve Bank of India.
Among the criteria announced was the mandate for non-banking financial companies (NBFCs) to lower their net non-performing asset (NPA) ratios to under 6%. NPA ratios are basically the number of non-performing or bad loans as a percentage of the company’s total assets.
The guidelines weren’t likely to impair a majority of NBFCs in the country. For instance, Shriram Transport Finance, a leading financier for vehicles, had a net NPA ratio of 3.22% for the quarter ended December 2021, according to a report from credit rating agency ICRA.
The ones that did find themselves in the dock were the financiers backed by auto companies. Among the three lenders mentioned earlier, Tata’s captive financing arm had the worst performance, with a net NPA ratio of 17.9%. Hero FinCorp’s NPA ratio stood at 6.7%, while Mahindra’s was at 6.4%.
The three are among India’s sizeable auto financiers. For the quarter ended December 2021, TMF’s asset size stood at Rs. 34,618 crore ($4.4 billion); Hero’s was Rs 26,817 ($3.4 billion) crore in 2021.
And even though their assets pale in comparison to the likes of pure-play financiers such as Shriram (Rs 1,17,243 crore) or Cholamandalam (Rs 78,709 crore), their strategic importance to manufacturers is underlined by the fact that a big chunk of the sales of the parent companies is routed through them.
If left unchecked, the delinquency numbers would place Tata Motors in the highest risk category in the RBI’s corrective framework. Controls such as restrictions on expanding its branches, and a suspension on all capital expenditure except tech upgrades would soon follow.
The main reason that RBI issued such a framework was to reduce the number of regulatory loopholes that NBFCs could capitalise on, a credit rating analyst told The Ken. And NBFCs had way more loopholes to capitalise on than bank lenders—the 6% NPA bar already exists for banks, even if only on paper.
The RBI’s framework is supposed to kick in starting in October 2022, and while the central bank initially said it would be enforced based on March financial results, it has since extended the deadline.
