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Author: Priyanka Chakraborty

How will Indian Automobile Industry change after COVID-19 Lockdown

The Automobile Industry in India is one of the largest industries of the country that contributes about 49% of the manufacturing GDP and 7.5% of the overall GDP. The USD 100 billion industry provides employment to about 32 million people. In the last decade, the production of two-wheelers has increased by about 100% and the production of four wheelers, both passenger vehicles and commercial vehicles, has almost trebled. In 2018, the Indian Automobile Industry became the 4th largest Automobile Industry in the world. The growth of the Indian Automobile Industry is driven by two-wheelers and passenger vehicles as their total market shares were 80.8% and 12.9% respectively. Small and mid-sized cars dominate the passenger car sales. The following chart shows the market share of each segment.

Automobile Industry: Present Scenario

The Indian Automobile Industry has witnesses a boom in the last decade as-

  • There was a rise in the income of the middle class and also the number of youth in the population has increased.
  • 5% of India’s total FDI inflow was directed towards the automobile sector.
  • The Indian Government also took various initiatives like reducing GST, setting up National Automotive Testing and R & D Infrastructure Project (NATRiP) Centers and National Automotive Boards etc.
  • The companies started exploring rural markets.

Market Size:

  • The domestic automobile production increased at 2.36% CAGR between FY’16 – FY’20.
  • The domestic automobile sales increased at 1.29% CAGR between FY’16 – FY’20.
  • Automobile export grew at 6.94% CAGR between FY’16 – FY’20.
  • In FY’20, 26.36 million vehicles were manufactured and over 20.1 million vehicles were sold in India.
  • 77 million vehicles were exported in FY’20.
  • There was a growth of 20% in the sales of Electric Vehicles (EVs) as 1.56 lakh units were sold in FY’20.

The Great Indian Automobile Industry Crisis:

The spectacular growth of the past decade came to a screeching halt in the year 2019 as the country started to witness the worst kind of slowdown in its automobile sector. There was a huge decline in the demand and sales of passenger vehicles. In July 2019, passenger car sales declined to 31%, the lowest in 18 years, and in August 2019 it declined to 29% as compared to the sales of the previous year. There was a huge downfall in the sales of two-wheelers and commercial vehicles also.

A number of manufacturers started to cut their production and many production units were shut down.

Major reasons behind this slowdown can be summarized as under:

  • Over production and stocking by the companies
  • Reduction in consumer spending power due to decreased income level of the customers
  • New BS-VI emission norms
  • Increased costs mainly purchase cost and maintenance cost
  • Lack of promotion of the Electric Vehicles and
  • Distress in the rural segment of the car market 

Automobile landscape: How will it change?

The main factors that have driven the decline in sales of personal vehicles are rapidly growing urbanization, heavy traffic and also the increased cost of owning and maintaining a vehicle. But the ongoing pandemic COVID-19 will change the way people in India move around. Those who used to rely on public transport and other app cabs will now turn into motorists. They will start to commute by personal vehicles due to hygiene issues.

The following trends will be seen in the post Covid-19 era-

  1. Two-wheelers and used cars will be in demand: As it is unlikely that majority of the people who used to travel by public transport will be able to afford a personal four-wheeler, the demand for two-wheelers and used cars will increase. After the pandemic started to spread, there is already a rise in the sale of used cars as that is a more affordable way of transport in this situation. As the people of the country are facing pay cuts and their jobs are also at risk, customers are looking for the most economic way of transportation that will make them spend the lowest. Over 40 lakh units of used cars have been sold in FY’20 which is 40% higher than the sale of new cars.
  2. The potential customers will be affected: The Indian Automobile market consists of a diversified segment of customers. The sale in Indian market is driven by the businessmen, traders and also the rural customers. And these are the peoples whose income has been affected by the COVID-19 lockdown. These potential customers will take time to turn around and they will have a tough time making a purchase decision due to the uncertainty over the future.
  3. ‘Work from Home’ culture will be the new normal: The ongoing corona virus pandemic has made ‘Work from Home’ culture the new normal. All the organizations are running with limited work force and most of the employees are working from home. As a result the transportation needs of the companies as well as the individual employees will go down sharply, which will lead to lower demand and sales.
  4. Online Sales will increase: The operating costs of the dealers are already rising day by day while the sales are going down significantly. And with this COVID-19, there will be some additional costs like costs related to maintaining social distance, sanitization of the workplace, screening and monitoring of the employees, providing masks and PPE kits to the employees. As a result of this increased operating cost, the companies will be forced to shift from the Brick and Mortar structure to the digital platform.

The above factors will lead to a drastic change in the actual sales figure for the current fiscal year. The Q1 FY’21 is expected to be a complete sales washout.

According to the reports of CRISIL Research, a double digit decline can be expected this year due to this lockdown.

  • The sale of passenger vehicles is expected to decline by 24% – 26%.
  • A decline of 21% – 23% is expected for the two-wheelers.
  • The sale of commercial vehicle is expected to fall by 26% – 28%. 

Conclusion:

Considering the present scenario, it is unlikely that the automobile sector of India will go back to its pre- COVID-19 situation anytime soon. There will be significant changes in the consumer preference and buying behavior of the consumers. The post COVID-19 era will bring in many challenges as well as many opportunities. The companies will now rely intensively on digital showrooms for increasing their customer base and the Electric Vehicles will surely make a place in the Indian market.

PROBABLE IMPACT OF COVID – 19 ON INDIAN BANKING SECTOR

The pandemic CORONA Disease which has created mayhem is a situation which every person living in this planet has witnessed for the first time. This has directly or indirectly affected every country and every class of people. As on 29.04.2020, 32.21 Lakhs people have been infected and the death toll has reached 2.29 Lakhs.

United States, Spain, Italy United Kingdom, Germany, France, Turkey, Russia and Iran are most affected by this virus. India is still in a better position with 33 Thousand affected and 1074 deaths. But the pandemic is still growing with 1813 new cases as on 29.04.2020.

Such massive situation is bound to impact the Indian Economy very badly and it may delay the Government’s aim of reaching $5 Trillion by 2024-25. It will affect all the sectors of economy but the impact will be felt mostly on the following sectors:

  1. Aviation Sector
  2. Hotels
  3. Tourism
  4. Real Estate
  5. Entertainment
  6. Textiles
  7. Steel
  8. Power/Energy
  9. Banks
  10. NBFCs
  11. Automobile
  12. MSMEs

Keeping in mind the Government’s agenda of achieving $5 trillion economy by 2024-25, government has emphasized the actions of Banks in supporting important sectors of economy.

If we try to analyse the impact of COVID-19 on Banking Sector, which is the ultimate support for any financial/economic activity, we will see the following points:

  • Decrease/Lack of Growth in Deposit Base:

Since the start of Lockdown imposed by the Central Government, most economic activities have been stopped. Depositors have started to panic and they are withdrawing their fund from bank accounts for any emergency. With persons working in unorganized sectors having NIL or minimum income their savings are zeroed out. Even after the situation returns to normal, it will take a much longer time for people to have extra fund available for savings. Some large corporates are also forced to go for pay cuts and organizations are planning to cut expenses. So the chances of banks increasing their deposit base are very low.

Further worsening the situation is the trend showing reduction in Low Cost Deposit or CASA (Savings Deposits and Demand Deposits) which is directly related to Bank’s profitability and Lending Rates.

  • Decrease in Retail Lending:

With expected lower income of middle class, spending and investing habit will undergo huge                                               change. The near future will see drop in purchase of residential property which will hamper the secured retail loan growth.

The automobile industry is already in stress and has undergone dip in units sold YoY. With the CORONA situations prevailing, chances of any increase in sales of personal vehicles in the upcoming festive season are pretty less. This will further impact retail lending of banking sector.

Stress in Asset Quality:

RBI and Ministry of Finance has provided certain relaxation for Loan holders due to financial stress faced by them due to CORONA Outbreak and lockdown imposed.

However the worrying situation prevails as:

  1. With income drying up for small businesses and persons with less income, chances of them being able to continue repaying EMIs/Interests are doubtful.
  2. The aviation industry being Capital Intensive Sector, is having large borrowings from banks. With passenger air traffic being stopped for a longer period, aviation companies will be out of fund to repay the bank borrowings.
  3. Hotel Industries are also going to bear the brunt. With bare minimum transportation (even after lockdown is withdrawn) chances of tourism industry bouncing back is very less. Further, corporates are adopting Video Conferencing and Tele-Meetings which will further drop the occupancy rate of hotels. With no substantial income coming, hotel / tourism sectors are likely to default and put stress in the asset quality of banks.
  4. With less demands from industries, steel sectors will not be able to generate cash/fund inflows required for repaying bank borrowings.
  5. Power/Energy sector is experiencing less demand and not able to generate revenues. This will also worsen their capacity to service bank repayments.
  6. Bank’s having exposure to NBFCs will face the heat although RBI has granted three month’s moratorium to them.
  7. With MSMEs facing the toughest periods, loans/credits granted to MSMEs are bound to have defaults.

Reduction in Operating Profits:

With decreased Low Cost Deposits, Cost of Lending will be higher. However, banks will not be in a position to increase the Interest Rates for Loans. This will impact the operating profit of Banks. With waiver of minimum balance charges , waiver of charges on digital transactions, increased cost of operation due to this pandemic, hampering of normal business, banks will experience reduction in operating profit.

 

  • Mounting of Provisions on Bad Loans:

With asset qualities decreasing, banks will have to add provisions for bad and doubtful loans. This will impact the Net Profit. Further, standard retail loans and secured loans attract less provision. Since, banks are advised to provide more finance to MSME sectors and Unsecured Loans, provisions will be on the higher side directly decreasing the Net Profits.

  • Delay in recovery proceedings:

Due to lockdown, DRT, Courts and DM Offices where large number of applications from banks regarding default in payment are pending are not functioning. This is delaying the recovery and collection efficiency.

  • Recruitment/ Increase of Branches by Banks:

As on 31.03.2018 there were 27 PSBs in India. After merger, the number is now 12 as on 01.04.2020. Now where the merged/consolidated banks are having more than one branches are being closed. This is leading to decrease in bank branches and pause in mass recruitment by PSBS. Further, with less economic activities and lower business growth, any substantial recruitment by banks in India is not on the cards.

Except these, with new work cultures being adopted by industries and largely by societies, the actual impact on banks can be assessed only after normalcy returns and at lease 3-4 quarters of normal business.

Result of Axis Bank (Declared on 28.04.2020):

Most of the Indian Banks have not published their results for Q4 2020.

On 28.04.2020, Axis Bank has declared their results for Q4 2020. The same can be summarized by:

  • Net Loss stood at 1387.78 Crore against Net Profit of 1505.06 Crore in the same period Last Year.
  • Provisions and Contingencies increased by 185% YoY and stood at 7730.02 during the quarter ( Of this 3,000 Crore is related to COVID-19 ).
  • Slippage of 3,920 Crore has been recognized for the Quarter against 3,012 Crore last year.

With Government and RBI taking various steps for uplifting of Indian Economy post Covid-19 situations and nearly 10 lacs bankers working for the larger cause of society and uplifting of Indian Economy,  we can hope that the bad impact of CORONA Virus in the Banking sector and overall Economy will be minimized. This will require dedication, discipline, honesty, right attitude from all the sectors of society. On the changed global scenario, this is also an opportunity to improve the Indian Economy and transform India into a Financial Super Power .

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