Banks are likely to confront a sharp rise in defaults in automobile loans given to drivers attached to online cab aggregators due to the prolonged coronavirus lockdown and possible reluctance of customers to take public transport in the foreseeable future, industry officials said.
Drivers typically take a bank loan to purchase vehicles that will have a repayment period of around five to seven years. But with the lockdown hitting the economy starting late March, cab aggregators are out of business. Many of them are not in a position to repay lenders.
“Servicing these auto loans for cab drivers as well as aggregator platforms which lease vehicles to drivers would be extremely difficult given the lockdown has affected their revenue flows,” said a founder of a Mumbai-based lending platform which had some exposure to cab drivers in the past but subsequently stopped that line of business. “Most of the migrant workers have gone back to their natives, with earnings drying up most of them will not be in a position to repay the loans they have taken,” the founder said, asking not to be named.
Banks may not feel the pain immediately on account of the moratorium extended to all term loans by the Reserve Bank of India (RBI). On March 27, the RBI announced a three-month moratorium to help borrowers tide over the Covid-19 phase. This was extended recently until August in view of the lockdown extension.
Most of the repayments are under hold as a result. But bankers said the moratorium may add to the repayment burden of borrowers.
That is because the interest component continues to accrue on the outstanding loan amount during the moratorium period. This will reflect in the repayment schedule later in the form of higher EMIs (equated monthly instalments) or additional instalments.
Banks have a sizeable exposure to auto loans. According to RBI data, as on April 24, banks’ total outstanding amount for the overall vehicle loans segment was at Rs 2.16 lakh crore. This includes both personal and commercial vehicles.
A diesel Swift Dzire, one of the most common cars to ply on the Uber and Ola platforms, can cost between Rs 6 lakh and Rs 8 lakh. A back of the envelop calculation shows that the EMI comes to somewhere around Rs 15,000. For commercial vehicles, the EMI tends to be higher as the tenure is lower.
Industry estimates suggest these platforms together have more than 1.5 lakh cabs in Delhi NCR alone and the number for the whole country could be close to 3 lakh.
An email sent to Ola Cabs remained unanswered. Uber Technologies said it will not comment for this article.
Typically, banks assess the creditworthiness of the borrowers (cab drivers in this case) on the basis of cash flow predictions given by the taxi aggregators. Secondly, banks would be ready to extend loans since the car would remain hypothecated to the bank and the loan is secured, said a banker who spoke on the condition of anonymity.
“Banks and NBFCs assess the repayment capacity of the drivers on the basis of expected number of trips, the earnings in each location etc, as portrayed by the aggregators. Covid has significantly impacted the number of rides they get and hence the ability to repay (Sic),” said Bhavik Hathi, managing director at consultancy firm Alvarez and Marsal.
The lockdown has impacted multiple sectors but the uncertainty around reopening of public transport is the worrying factor for cab aggregators.
“In the post COVID world, a large chunk of the original cab riders might prefer to use personal vehicles initially and hence it is expected to take three to six months for them to get back to 50 percent of their original ride volumes,” said Hathi.
This problem could get worse if companies push towards remote working for their employees. This would mean a large number of executives who used to commute in cabs will not be using the service, thereby altering peak hour customer trends on these platforms.
Recovery a challenge
While repayment might be a challenge, the vehicle continues to show as an asset on the books of the lenders, which means they will not lose money on the business. But here, the challenge for banks is to track down the vehicles and sell them in the second hand car market.
Regarding Ola and Uber, there could be certain restructuring options on the table for the lenders, said fintech policy consultant Mandar Kagade. “Like what happened with Hertz, the four wheelers underlying the loans could be sold off (to square off the exposure),” he said.
Hertz is an American car leasing company that recently declared bankruptcy.
Drivers could have benefited from a personal bankruptcy regime, that is long overdue now.
“In the interim, I can see government intermediated solutions to the stress emerging like giving lenders some asset classification relief or offer guarantee through a special purpose vehicle,” Kagade said.
In 2016-2017, a sudden fall in drivers’ income had caused many Ola and Uber drivers to default in their EMI payments. Many NBFCs and banks which were actively lending to this category then had actually stopped this line of business.
According to an ET report, State Bank of India and Axis Bank both had suspended giving loans to these segments at that point.
“Drivers were promised five figure earnings at that point in time, as more people came in driver commissions were drastically reduced by the platforms, leaving the folks with hardly any ability to repay,” said a banker quoted above.While one challenge is to recover the vehicle, second is to track down the drivers, many would have gone back to their natives and the bank, in most of the cases, might not have any records of their native addresses said Anubhav Jain, cofounder of digital lending platform Rupifi which works with online aggregators for business loans.