Working Capital May Get Expensive For Auto Dealers Amid Crippling Slowdown

Working capital for auto dealers may get expensive as the country’s largest lender has proposed higher collateral amid an auto sector slowdown.

State Bank of India is looking to tighten lending terms for auto dealerships, Vinkesh Gulati, vice president of Federation of Automobile Dealers Associations, told BloombergQuint, citing an internal memo. SBI, he said, is proposing a 25 percent collateral over and above the inventory on renewal, increase or issue of fresh loans.

Earlier, the collateral used to be the stock a dealer would purchase from an automaker against a letter of comfort provided by the manufacturer to the bank, he said.

Auto sales in India have sputtered since the Diwali festive season last year, forcing automakers to lay off workers and shut showrooms. There is no immediate relief in sight as car and two-wheeler sales declined again in July, according to a BloombergQuint survey of 10 large automobile dealers.

The proposal for a higher collateral was also done to put pressure on automakers to reduce inventory, a dealer told BloombergQuint requesting anonymity.

According to Sugato Sen, deputy director general at industry lobby Society of Indian Automobile Manufacturers, this is not a time to put pressure on an industry which is already stressed. “Inventory finance was already impacted when GST was introduced, and now with collateral, the cash-strapped dealerships will find it difficult to come out of the downturn.”

Banks are also looking to change inventory funding guidelines, the person cited earlier said, adding that State Bank of India is also considering a proposal where they will deny lending to auto dealers if the inventory days are high.

SBI, however, is not the first bank to do so. Over the last six to eight months, several banks have also tightened lending terms, Gulati said, adding that this is the first time specifics have been disclosed. “Other banks are also asking for around 25 percent collateral but it varies from case to case,” Gulati said. He declined to name other lenders.

SBI is yet to respond to BloombergQuint’s queries on the proposal of higher collateral for auto dealerships.

Meanwhile, FADA in a statement said SBI has assured them that it will take necessary steps to resolve the issues to reduce stress among auto dealers. The lender, Gulati said, has assured that any decision to charge collateral will be done on a case to case basis so that undue stress is not put on dealers.