This is because the rising new vehicle prices, driven by the changes in emission norms, technological changes and higher commodity prices, have made the purchase of new vehicles out of reach for first-time buyers, driver-cum-operators and small road transport operators.
Also, factors such as the high food inflation, heat wave leading to lower vehicle turns, moderation in capacity utilisation due to the elections and slowing down of rural economy could impact borrowers’ cash flows in the first half of this fiscal year, as per the rating agency.
The spatial distribution of monsoon remains a key monitorable, India Ratings said.
Meanwhile, capacity utilisation levels for vehicle operators carrying agriculture load have moderated due to moderate food production growth in 2024.
As per the second advance estimates, the production of kharif and rabi food grains in 2023-24 was 1.3% lower than the final estimates of the previous year.
The rating agency believes there needs to be a further improvement in the overall capacity utilisation levels to drive CV demand growth above single digit for FY25.
“Vehicle financiers have seen higher disbursements in FY24, driven by value-led growth due to vehicle prices moving up because of inflationary pressures. Also, used vehicles have seen significant upward price movements, thereby driving AUM growth for vehicle financiers. However, FY25 growth rates are likely to decrease from FY24 levels,” said Karan Gupta, Director, Financial Institutions, India Ratings.
The rating agency also expects non-bank finance companies to continue to focus on used vehicles as assets class, presenting a favourable risk-return in terms of asset quality and pricing power.
Meanwhile, the tractor segment's performance is also tied to monsoon conditions and rural economic activity. Tractors serve both agricultural and non-agricultural purposes.
Tractor sales have declined from the peak levels seen during the pandemic due to prior robust sales and labour shortages. There has been a rise in asset quality pressures in the tractor segment due to the past erratic rainfall and the first quarter of this year being the election period, leading to lower capacity utilisation levels.
While the above-normal monsoons might boost tractor demand, distribution of rainfall would be key to keep a tab on asset quality. Also, a rise in minimum support prices across different states would define farm income levels to support repayments.
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