Global rating agency Moody's Investors Service has said that vehicle finance companies in India, which depend on short-term fund, might face refinancing problem due to the ongoing economic slowdown and tight liquidity.
According to a latest Moody's report, vehicle finance companies in Indonesia and India are among the fastest growing in Asia, benefiting from favourable economic and demographic conditions. However, their reliance on short-term funding and thin liquidity has left them vulnerable to sudden downturns.
"A key risk for vehicle finance companies in both countries is their heavy reliance on short-term wholesale funding, as highlighted by a default by IL&FS that sparked a liquidity crisis for the entire non-bank finance sector in India," said Simon Chen, a Moody's Vice President and Senior Analyst.
"Liquidity risks are lower for Indonesian vehicle finance firms, despite their higher reliance on short-term funding, thanks to their stronger profitability and asset quality," added Chen.
While vehicle finance during normal times can avoid a liquidity crunch by generating steady cash flow from loan repayments while refinancing debt without much difficulty, liquidity stress can quickly arise when macroeconomic conditions deteriorate rapidly or market liquidity tightens substantially, Moody's said in its report.
The agency said Indonesian companies' better profitability is driven by their business focus on high-yielding segments, and by an industry structure with limited competition from banks, which helps keep lending rates high. And while Indonesian companies focus on riskier segments than their Indian peers, their stronger profitability helps them maintain better asset quality by enabling them to write off and resolve problem assets quickly, it noted.
Edited by Chitranjan Kumar