Fada to approach lenders requesting caution while funding dealers

Dealers' body has written twice to SIAM raising alarm bells over unsold inventory which amounted to 70-75 days valued at Rs 77,800 cr in August

In a bid to mitigate the alarming buildup of unsold passenger vehicle (PV) inventory, the Federation of Automobile Dealers Associations (Fada) is all set to formally approach banks and non-banking financial companies (NBFCs) with requests to exercise caution while disbursing funds to dealers.

This comes after the dealers' body wrote twice to the Society of Indian Automobile Manufacturers (SIAM), raising alarm bells over the inventory pileup. Approaching the banks is crucial as the association highlights that overfunding by banks and NBFCs and further stockpiling could lead to a downward spiral in dealership profitability.

In August, unsold inventory amounted to 70-75 days and was valued at Rs 77,800 crore, causing financial stress to dealerships across the country.

Manish Raj Singhania, President of Fada, emphasised the need for financial prudence within the auto retail industry.

"We will be writing to all NBFCs and banks to ensure that funds are disbursed based on dealership stock levels and not overfunded, especially with the festival season approaching," he said.

Singhania also urged that no funds be disbursed without the consent of the dealers, even when requested by original equipment manufacturers (OEMs), to avoid further stock accumulation.

The association also highlighted how the extended inventory levels are eroding dealership profitability. Dealerships typically operate on thin margins, averaging between 3 per cent and 4 per cent, and the burden of excess inventory — often financed through loans — is exacerbating their financial woes.

 Every 10-day increase in inventory translates to higher interest costs, which can erode margins by nearly 2 per cent.

"If two months of our margin goes into paying interest, it becomes an unsustainable burden for dealerships," Singhania said.

The upcoming festival season, while expected to boost sales, could also exacerbate the inventory problem if dealers overstock in anticipation of increased demand.

Fada fears that if the stock levels do not correct after the festival, dealerships could face a severe liquidity crunch and may be forced to resort to liquidation.

Fada's concerns are due to the dip in retail sales of PVs, which fell by 4.53 per cent year-on-year in August, with 309,053 units sold compared to 323,720 in August 2023. The decline has been attributed to sluggish consumer demand worsened by excessive rainfall, and an "alarming" leftover inventory. On a month-on-month basis, sales dropped by 3.46 per cent. 

With unsold stock piling up, Fada has warned that if there is a correction post-festival season, the situation will likely worsen as dealerships face year-end sales pressures and additional discounts. This could further strain already thin profit margins, endangering the financial viability of dealerships nationwide.

As Fada continues its efforts to address this critical issue, its outreach to banks and NBFCs seeks to prevent overfunding, stabilise stock levels, and protect dealers' financial health ahead of an uncertain market period.