Cabs May Drive Up NPAs

Banks are likely to witness a rise in defaults in automobile loans towards cabs attached to online cab aggregators like Ola or Uber. Slump in demand, lockdown due to Covid, and slow recovery rate will play a vital role in determining the extent of the NPAs.

Crux of the Matter

Automobile Loan Sector
Generally, automobile loans are taken with a repayment period of 5-7 years. As of April, banks’ total outstanding amount for the vehicle loan segment was ₹2.16 lakh crore. This includes both personal and commercial vehicles.

Uber and Ola’s platforms combined have 1.5 lakhs car in Delhi NCR and around 3 lakh across the country. Cars taken on loan by cab aggregators on average are priced between 5- 8 lakhs. Monthly average EMI comes around ₹15,000 for it due to the short tenure of the loan.

Even if, 1 lakh cars amongst the 3 lakh are on loan and average ₹15,000 EMI per month is paid then banks accumulate a loss of 1 lakh cars x ₹15000 = ₹150 crores. RBI has announced a moratorium on term loans for 6 months. Therefore, estimated losses borne by banks could go up to as high as ₹900-1,000 crore.

Rise In Risk Of NPA
Banks are likely to face a rise in NPAs in loans given to drivers of Cabs of aggregator platform. The moratorium would also result in burdening the borrower as the interest component continues to accrue on the outstanding loan during the moratorium period. The repayment schedule will reflect higher EMIs, which may lead to NPAs as revenues of cab drivers have stopped due to lockdown and Covid-19 Crisis.

Banks may also face the challenge of recovering the amount by selling a vehicle in second hand. But banks would be ready to extend fresh loans since the car would remain hypothecated to the bank and the loan is secured.

Other Factors Likely To Exacerbate NPAs

  • Uncertainty over restriction on public transport – phased recovery
  • Cab riders’ preference of using personal vehicles over Cab in wake of Coronavirus
  • Experts estimate at least 3 to 6 months to get back to 50% of original ride volumes
  • If companies push towards remote working, a large chunk of employees using cabs will not use it anymore
  • Revenue loss during the lockdown may result in less commission to drives by Cab service platforms
  • On May 10, 2019, Uber became a public company via an initial public offering. Following the IPO, Uber’s shares dropped 11%, resulting in the biggest first-day dollar loss in IPO history for the US. A month after going public, both COO Barney Harford and CMO Rebecca Messina stepped down.
  • Evergreening is a practice whereby banks extend even more loans to debt-laden companies to help them repay previous loans and hopefully earn enough revenue along the way to get out of trouble. Usually, it results in increased NPAs. The term is not to be confused with Evergreen Loans.
  • As per the Narasimham Committee, NPAs had been the single largest cause of irritation of the banking sector of India. The committee had highlighted that ‘priority sector lending’ was leading to the buildup of non-performing assets of the banks and thus it recommended it to be phased out. Subsequently, the Narasimham Committee-II also highlighted the need for ‘zero’ non-performing assets for all Indian banks with an international presence.