Auto parts makers expect banks to restructure their dues incurred during the moratorium period using less stringent conditions to assist companies whose businesses were hit severely by the pandemic.
An expert panel led by former ICICI Bank Ltd chief executive K.V. Kamath on the one-time restructuring of stressed loans had recommended that banks ignore the current ratio while restructuring loans due to the adverse impact on vehicle production and sales. The recommendations were released by the Reserve Bank of India (RBI) on 7 September.
Current ratio of a firm is its current assets divided by current liabilities, and is a measure of short-term liquidity.
“We are not prescribing any threshold for current ratio due to the ‘just in time inventory’ business model for raw materials and parts, and finished goods inventory is funded by channel financing available from dealers,” the committee said in its report.
As part of the just-in-time model of production followed by the automobile industry, vehicle makers do not store spare parts in a bid to control costs. Instead, vendors supply on an hourly basis based on the number of vehicles that would be assembled by a company on a given day.
Vinnie Mehta, director-general of Automotive Component Manufacturers Association (Acma), said the pandemic disrupted the just-in-time production model and impacted the financial metrics of the auto parts makers.
“Hence, they cannot be judged by the same metrics used during the pre-pandemic situation. Now, most manufacturers are in need of working capital loans, and the auto sector has been in distress since the last year-and-a-half. So, banks should not look at the current ratio for the time being while disbursing short-term loans; then it will help component manufacturers get working capital loans under less stringent terms,” Mehta said.
Carmakers and part suppliers had to shut factories from 22 March to comply with the lockdowns announced by the Centre and the states to contain the spread of covid. Production though has picked up substantially since July as automakers began replenishing dealer stocks for the festival season.
This is attributed to a pent-up demand in rural areas and the lower base of last year. Auto sales across segments have been declining from the second half of FY19. In FY20, sales fell 15%-25% across categories after posting a low single-digit rise in FY19.
The Society of Indian Automobile Manufacturers (Siam) has forecast vehicle sales to drop 25% to 45% this fiscal.
Most parts producers posted losses in the June quarter and are expected to stay in the red in the second quarter as well.
Manav Kapur, director, Steel Bird International, said suppliers had low stocks due to the lockdown and when production resumed, supplying parts to vehicle makers became a challenge due to a shortage of workers and trucks.
“The just-in-time model got disrupted when OEMs started manufacturing vehicles. So the cash flow and other ratios of suppliers got impacted and banks need to help these firms. OEMs are working capital negative; they buy components in credit and sell to dealers in advance. So the pressure on them is less,” Kapur said.
“The current ratio and working capital covenants got distorted due to the lockdown and many firms went into negative cash flow. So while restructuring, banks have to be sensible since the sector has been struggling for two years now,” said an analyst with a foreign brokerage, seeking anonymity.
Accepting the panel’s proposal, RBI said banks must ensure recast loans meet specific financial parameters by March 2022.