Vehicle Sales Slowdown Spurs Demand for Extended Financing

As passenger vehicle sales decelerate, manufacturers are urging auto financiers to extend the credit period for dealers from 60 to 90 days. This request, discussed at the Federation of Automobile Dealers Associations’ (Fada) third Annual Finance & Insurance Summit, reflects growing pressure on retail channels due to slow sales and increasing inventory at dealerships. Akhilesh Roy from HDFC Bank highlighted the significant demand from major manufacturers like Maruti Suzuki and Hyundai Motor India for this credit extension. However, dealers argue that longer credit periods would increase financial strain due to higher interest costs, especially as current stock levels have risen to 55-60 days, up from the usual 30 days for this season.

India’s automakers typically operate on a ‘cash and carry’ model, where retailers secure loans from banks and non-banking financial companies to purchase inventory for 45-60 days at interest rates between 7.5% and 9.25%. The increasing inventory levels, now at a 60-day stockpile, could impose a substantial financial burden on dealerships due to additional interest costs. This situation mirrors trends from 2018-19 when high inventory levels led to the closure of around 282 passenger vehicle dealerships. Fada is currently in discussions with the Society of Indian Automobile Manufacturers (SIAM) to address these issues, but original equipment manufacturers (OEMs) are pushing for an extension to 90 days, potentially worsening the inventory problem for dealers.

In May, retail car sales in India dropped by 1%, reflecting a slowdown in wholesale growth. This decline, attributed to elections and extreme heat, impacted demand and delayed purchase decisions. Two-wheeler sales growth also slowed to 2.6% in May from 33% in April. Overall retail sales across all segments grew by 2.6% year-on-year in May, compared to a 27% rise in April. The auto industry, contributing 7% to India’s GDP, serves as a significant indicator of private consumption. Dealers face challenges with increasing inventories of slow-selling models, particularly small cars, as their prices have outpaced the income growth of target customers. This has resulted in retail sales growth lagging behind wholesale growth, putting financial strain on dealers.

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