Shadow banking crisis sends India’s autos sector into a tailspin

A worker adjusts the windscreen wipers of a parked car at a Maruti Suzuki
Updated 05 August 2019

Shadow banking crisis sends India’s autos sector into a tailspin

  • Narendra Modi’s 2016 ban on high-value bank notes, higher tax rates under a new goods and services tax regime, a boom of ride-sharing firms such as Uber and Ola, and a weak rural economy have all played a role

MUMBAI: Sudhir Gharpure and his sales team sat chatting at a big Maruti Suzuki dealership on the outskirts of Mumbai some two hours after its doors were opened on a recent Saturday morning — not a single customer was in sight.
“There used to be close to 15-20 bookings each day, but now we’re down to 3-5 on good days,” said Gharpure, the general manager at the dealership.
Gharpure’s experience is not an isolated one. Across India dealerships are being pushed out of business and the Indian auto sector is going through its biggest slump in nearly two decades. Passenger vehicle sales fell for eight straight months until June, and in May sales dropped 20.55 percent — the sharpest recorded fall in 18 years.
Preliminary data indicates passenger vehicle sales may have plunged as much as 30 percent in July. The slump in India, along with a simultaneous slide in Chinese auto sales, is a blow for automakers wrestling with higher costs driven by more stringent emission norms and a push to develop electric cars.
Unlike in China, where the plunge in cars sales has been caused largely by new emissions rules, India has seen a mix of factors that have combined to erode demand for automobiles.
Prime Minister Narendra Modi’s 2016 ban on high-value bank notes, higher tax rates under a new goods and services tax regime, a boom of ride-sharing firms such as Uber and Ola, and a weak rural economy have all played a role.
But many dealers and automakers agree it is a deepening liquidity crunch among India’s shadow banks that has been the biggest single factor in an auto sales collapse, which some fear may lead to more than a million job losses.
Non-banking finance companies (NBFCs), or shadow banks, have dramatically slashed lending following the collapse of one of the biggest, IL&FS, in late 2018.
IL&FS, or Infrastructure Leasing & Financial Services Ltd, was a behemoth in shadow banking and its defaults and unraveling, amid fraud allegations, have dried up funding for rivals and led to a surge in their borrowing costs.
Non-bank or shadow banking firms generate credit outside traditional lenders, by means such as collective investment vehicles, broker-dealers or funds that invest in bonds and money markets.

HIGHLIGHTS

• Shadow banks, or NBFCs have long funded vast chunk of auto sales.

• With NBFCs struggling, part makers, dealers, buyers stung badly.

• Dealer inventories hit 55-60 day levels, up from 45 days.

• Some 286 dealerships have shut down in the last 18 months, says FADA.

• Banks fear crisis could result in new wave of bad debt on books.

In India, NBFCs have in recent years helped fund nearly 55-60 percent of commercial vehicles both new and used, 30 percent of passenger cars and nearly 65 percent of the two-wheelers in the country, according to rating agency ICRA.
To aggravate matters, the stress in the autos market has also prompted banks to begin trimming their exposure to the sector.
“The car doesn’t sell, it’s the finance that sells,” said R. Vijayaraghavan, a senior marketing consultant at the same Mumbai dealership. “Today the finance is not selling, so the cars are not selling.”

Problems amplified
Some 286 dealerships have shut down in the last 18 months across India as rising costs for inventory management have made businesses unviable, according to the Federation of Automobile Dealers Association (FADA), a lobby group of auto dealers.
“The slowdown in the (NBFC) sector has dragged down vehicle sales growth,” said A. M. Karthik, financial sector head at ICRA. “Now the auto slowdown is becoming more visible as the liquidity squeeze continues.”
Automakers including Maruti Suzuki, Tata Motors , and Mahindra & Mahindra are feeling the heat and have either cut production or temporarily closed plants to correct mounting stocks.
According to FADA data, passenger vehicle inventories now stand at 50-60 days up from around 45 days earlier, while those of two-wheelers are even higher at 80-90 days. For commercial vehicles, inventory levels range between 45 and 50 days.

Early recovery unlikely
With the autos sector employing more than 35 million people directly and indirectly, and contributing more than 7 percent to India’s GDP and accounting for 49 percent of its manufacturing GDP, the fallout from the autos slump is huge and presents a big challenge to Modi’s government as it begins its second term.
The entire supply chain, from vehicle manufacturers to component makers, are bleeding amid the slump.


Saudi Aramco shares soar at maximum 10% on market debut

Updated 11 December 2019

Saudi Aramco shares soar at maximum 10% on market debut

  • Company is now world’s largest publicly traded company, bigger than Apple

RIYADH: Saudi Aramco shares opened at 35.2 riyals ($9.39) on Wednesday at the Kingdom’s stock exchange, 10 percent above their IPO price of 32 riyals, in their first day of trading following a record $26.5 billion initial public offering.
Aramco has earlier priced its IPO at 32 riyals ($8.53) per share, the high end of the target range, surpassing the $25 billion raised by Chinese retail giant Alibaba in its 2014 Wall Street debut.
Aramco’s earlier indicative debut price was seen at 35.2 riyals, 10 per cent above IPO price, raising the company’s valuation to $1.88 trillion, Refintiv data showed.
At that price, Aramco is world’s most valuable listed company. That’s more than the top five oil companies – Exxon Mobil, Total, Royal Dutch Shell, Chevron and BP – combined.
“Today Aramco will become the largest listed company in the world and (Tadawul) among the top ten global financial markets,” Sarah Al-Suhaimi, chairwoman of the Saudi Arabian stock exchange, said during a ceremony marking the oil giant’s first day of trading.
“Aramco today is the largest integrated oil and gas company in the world. Before Saudi Arabia was the only shareholder of the company, now there are 5 million shareholders including citizens, residents and investors,” said Yasir Al-Rumayyan, the managing director and chief executive of the Saudi Public Investment Fund.
“Aramco’s IPO will enhance the company’s governance and strengthen its standards.”
Amin Nasser, the president and CEO of Saudi Aramco, meanwhile thanked the new shareholders for their confidence and trust of the oil company.
The sale of 1.5 percent of the firm, or three billion shares, is the bedrock of Crown Prince Mohammed bin Salman’s ambitious strategy to overhaul the oil-reliant economy.
Riyadh’s Tadawul stock exchange earlier said it will hold an opening auction for Aramco shares for an hour from 9:30 a.m. followed by continuous trading, with price changes limited to plus or minus 10 percent.

The company said Friday it could exercise a “greenshoe” option, selling additional shares to bring the total raised up to $29.4 billion.
The market launch puts the oil behemoth’s value at $1.7 trillion, far ahead of other firms in the trillion-dollar club, including Apple and Microsoft.
Two-thirds of the shares were offered to institutional investors. Saudi government bodies accounted for 13.2 percent of the institutional tranche, investing around $2.3 billion, according to lead IPO manager Samba Capital.
The IPO is a crucial part of Prince Mohammed’s plan to wean the economy away from oil by pumping funds into megaprojects and non-energy industries such as tourism and entertainment.
Watch the video marking Aramco’s opening trading: