Why there is a liquidity crisis in India

Shadow banking crisis hits India's auto sales

July 30, 2019 - In India, auto sales fell 17.5% year-on-year in June - already the eighth month of falling sales - triggered primarily by the shadow banking liquidity crisis.

Non-banking finance companies (NBFCs) - also known as shadow banks - have been under pressure since last year when Mumbai-based Infrastructure Leasing & Finance Services defaulted. The IL&FS default of 4.5 billion rupees ($ 65.4 million) had a domino effect on the entire shadow banking sector, triggering a surge in borrowing costs and an increase in pressure on the retail auto sector.

The State Bank of India (SBI) has tightened lending terms dramatically for auto dealerships. In March the SBI halted lending to dealers unless they provided between 25 per cent and 50 per cent collateral.

SBI’s loan exposure in the retail auto market was 718.8bn rupees ($ 10.4bn) at the end of March, according to regulatory filings.

Automaker Maruti Suzuki, which dominates with a 50 per cent market share, saw sales fall by 15.3 per cent in June to 114,861 units compared to the same month in 2018.

Both Maruti Suzuki India and Mahindra and Mahindra have announced temporary factory closures to reduce mounting stocks at their dealerships as well as factories.