When partnerships are struck, it starts off as a symbiotic relationship. There is a clear vision of how each partner can benefit the other. Sometimes, though, one entity ends up needing the other just a little bit more. When that happens, the partnership slips into dysfunctional territory. That's what’s playing out between automakers and their financing arms. Decades ago, automakers thought of a great hack to sell more vehicles—set up their own financing arms that would issue loans to buy vehicles. That's how Tata Motors Finance (TMF), Hero FinCorp, Mahindra and Mahindra Financial Services went on to become the additional wheel in driving up sales of two-wheelers, four-wheelers, and commercial vehicles. Between one-third and one-fourth of an automaker’s sales are often routed to the captive financing arm. The financing arms had to do this all the while also keeping an eye on the quality of their loan book. This dual mandate meant doing things few lenders would do. Like making loans even during the lockdowns when all banks had stopped lending. Or experimenting with loan sizes and lending to people banks usually won't lend, just because they have access to cheap funds. The repercussions always show up in the form of bad loans. Tata’s captive financing arm had the worst performance of all non-banks, with a net NPA ratio of 17.9%. Hero FinCorp’s NPA ratio stood at 6.7%, while Mahindra’s was at 6.4% for the quarter ended December 2021. This means these three non-banks would have found themselves in different risk categories, as per the Reserve Bank of India's corrective framework guidelines for non-bank lenders. These guidelines, which kick in from October 2022, mandate non-banks to lower their net non-performing asset (NPA) ratios to under 6%. Tata, with its high NPA, would have ended up in the highest risk category. Now, not only are the captive lenders reeling from high NPAs, but they are also dragging down the parent automakers' prospects. Investment bank Goldman Sachs slapped a ‘Sell’ rating on Hero Motocorp in a March 2022 research report, citing large loan losses at their captive financier. We at The MMS digs deep into the mechanics of the automaker-financier relationship and how it can be salvaged
