Decline in rural auto sales prompts banks to offer festive season deals

India's auto sector, burdened with Rs 80,000 crore in inventory, sees declining tractor sales post-harvest, leading lenders to exercise caution

The decline in rural demand for automobiles has led banks and financial institutions to roll out special offers for the festive season, including reduced interest rates, complimentary insurance, and extended repayment periods, according to a report by The Economic Times.

According to experts, India’s auto sector is currently burdened with an inventory valued at around Rs 80,000 crore. Tractor sales, which usually rise following good harvests and strong farm product sales, have dropped in the past two months. This decline is causing lenders with significant exposure to rural markets to exercise caution.

Rural regions represent a significant market for two-wheeler manufacturer Hero Motocorp, as well as car manufacturers like Maruti Suzuki, Mahindra & Mahindra, and Tata Motors, which dominate these areas in terms of sales.

 

Shift toward used cars, tractors in rural areas

The report quoted a senior executive from a finance company in South India as saying that rural consumers are currently opting for smaller-ticket items, leading to increased demand for used entry-level cars and tractors in upcountry regions.

Despite the onset of the festive season (August to October), the rural market continues to face challenges, with delayed purchasing decisions, weak consumer confidence, and ongoing heavy rains impacting sentiment.

The report quoted a spokesperson from Mahindra Finance as saying that the company's offerings will be tailored to regional markets, including underserved areas, with a focus on local needs.

Jefferies Brokerage has issued a ‘hold’ rating on Mahindra Finance shares, citing expectations of strong rural demand in the latter half of 2024, along with consistent disbursement trends, the report said.

Impact of weather anomalies on auto market

However, experts warn that prolonged heavy rains in September could damage crops, potentially affecting rural buying power.

Manish Raj Singhania, president of the Federation of Automotive Dealers Associations (FADA), noted that weather fluctuations can significantly influence the automotive retail market. News report quoted Singhania as saying that in August, India experienced 15.9 per cent more rainfall than average nationwide, with northwest India receiving a 31.4 per cent surplus.

“These weather anomalies have had a direct impact on India's auto retail market, which registered a modest year-on-year growth of just 2.88 per cent in August. Inventory has reached alarming levels, with stock days now stretching to 70-75 days and inventory totalling 780,000 vehicles, valued at an alarming Rs 77,800 crore,” Singhania said.

The two-wheeler market experienced a 7.29 per cent month-on-month decline in August, primarily due to heavy rains and flooding, which affected consumer demand, the report mentioned.

With the festive season on the horizon, various factors could challenge auto sales in the short term. India saw rainfall 16 per cent above normal levels in August, with further rains expected in September, according to the weather department. This excessive rainfall threatens crops nearing harvest, especially those sown in late June with a maturity period of 75 to 90 days. Although the festive season and stronger rural demand offer growth potential, ongoing weather uncertainties and high inventory levels may slow the recovery, the report stated.