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Recovery of truck loans a long haul

LiveMint logoLiveMint 15-06-2014 Vatsala Kamat

Truck rentals have been increasing in the past two months, but it might be too early to call a recovery in commercial vehicle sales.

For one, in a sluggish economy, the rise in truck rentals doesn’t always reflect increased demand; operators raise rates to offset diesel price hikes.

Rentals rose in April and May on movement of fruits and vegetables, wheat, and pre-election spending.

But for that, the demand for freight continues to be weak, which is not surprising. Data shows that the average annual Index of Industrial Production (IIP) growth rate, which was 14% between 2006-07 and 2007-08, slowed to almost 5% over 2008-09 and 2011-12 and then below 1% between the next two fiscal years. During these periods of low industrial activity, truck rentals have not been buoyant.

Prajakta Patil/Mint

That affects the economics of truck loan recovery for financiers and has a domino effect on new commercial vehicle sales.

If the rentals do not sustain this rise, it may exert pressure on the profit margins of truck fleet operators, which could lead to defaults on vehicle loans.

There is some hope on this front. India Ratings and Research points out that its Early Delinquency Index (EDI), which rose steadily between the quarter ended June 2011 and December 2013 and peaked at 8.7, has declined to 7.5.

But this alone is not good news for financiers. Low fleet utilization means it could be a long haul before loans which are overdue for 90 days or more are recovered. The stress on truck operators is reflected even in truck finance companies’ performance whose net interest margin has been slipping and the delinquency rate inching up. The average overdue collection efficiency, which was close to 80% for loans that originated between 2006-07 and 2009-10, dropped to 50% for loans of 2010-11 and 2011-12, according to India Ratings.

Things can turn positive only if there is a revival in the investment cycle, which boosts economic growth. That, too, is uncertain given headwinds like the forecast of a weak monsoon.

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