Financial industry analysts say the ongoing conflict between Russia and Ukraine could reignite problems related to the supply of semiconductor chips.
Banks and non-bank lenders operating in the vehicle finance market rely on the used vehicle segment to drive growth in the current quarter. According to analysts who monitor the financial sector, the ongoing conflict between Russia and Ukraine could reignite problems related to the supply of semiconductor chips and affect the delivery of new vehicles.
Auto financing was already lagging behind in the consumer loan universe even before Russia launched military action against its neighbor. According to industry data released by the Reserve Bank of India (RBI), bank auto loan outstandings rose just 2.5% year-over-year (yoy) in January 2022 to `2.81 lakh crore on January 28. Total private lending growth was at 11.6% in the same month.
Industry followers attribute the muted trend in vehicle financing to Covid-induced disruptions, lower availability of automobiles and commercial vehicles (UVs), as well as continued weakness in the two-wheeler, tractor and commercial vehicle (CV) segments. In a recent note, Emkay Global Financial Services — citing bankers — said the ongoing geopolitical crisis has raised new concerns about semiconductor supplies and vehicle availability. During the holiday season, however, the supply of fresh vehicles had improved.
“As a result, few financiers have ventured into financing used cars to gain volume and better yields… in the short term some caution could be exercised among bankers in case a protracted conflict between Russia and Ukraine could lead to fuel price hikes or business disruption. Emkay analysts said.
Motilal Oswal Financial Services said in a March 16 report that used vehicles across various product categories continue to show strong demand dynamics. “Used vehicle prices are up 8-12%, led by higher BS-VI vehicle prices and contributing to the higher value of payouts,” the agency said, adding that demand for new resumes and commercial equipment (CE) remains weak .
Some analysts have attributed weak demand for new vehicles to rising consumer prices. In a report dated March 14, Nomura analysts highlighted the risk of a slowdown in mass consumption segments due to rising inflation. Fuel prices are likely to rise further and there could be a 2-3% increase in customer cost of ownership for every 10 increases in fuel prices, they said. “Further concerns relate to consumer sentiment driven by factors such as lower economic growth and a rise in inflation,” analysts at Nomura said.
Consumer price index (CPI) inflation rose to 6.07% in February 2022, from 6.01% in January. The central government is believed to have refrained from raising fuel taxes ahead of five state assembly elections, but price hikes are now widely expected.
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