Tighter lending standards along with changing trends dent demand for fossil fuel-run vehicles
KATHMANDU, SEPTEMBER 10
The automobile industry in Nepal has been facing significant challenges in recent times, primarily due to a shift in the economic environment and evolving priorities among the general public and banks and financial institutions (BFIs). Also, growing defaults on auto loans of commercial vehicles after being unable to run at full capacity, heavy tariffs imposed on imported vehicles which make them expensive, and rigid procedures for approval of auto loans, among other factors, have collectively contributed to a decrease in the demand for vehicles in the country, weighing on automobile distributors and the industry as a whole, stakeholders say.
Policy hurdles
According to Dhurba Thapa, president of the NADA Automobiles Association of Nepal, the demand for auto loans has remained low as a result of unaccommodating policies of the Nepal Rastra Bank and BFIs' hesitancy to invest in automobiles apart from electronic vehicles (EVs).
"The total revenue of the automobile sector which stood at around Rs 100 billion has slumped by around 50 per cent. One of the key issues plaguing the sector is related to the loan procedures. With the economic activities experiencing a slowdown and a lack of liquidity in the market, many commercial vehicles are defaulting on their loans, which has dampened the demand. While there has been some improvement in the liquidity situation recently, banks have hesitated to invest significantly in the automobile industry although around 90 per cent of people rely on flexible auto loans for making a purchase. Moreover, when they do, BFIs seem to prioritise EVs over fossil fuel-run vehicles," Thapa shared.
He also said that the NRB's limit of 50 per cent on the loan-to-value ratio for traditional private vehicles, rigid requirements for loan approval, and imposition of 150 per cent risk weightage for automobile loans above Rs 2.5 million have dampened the demand growth for the automobile industry at present.
Preference shift
Another factor affecting demand is the changing trend in vehicle preferences.
People are increasingly shifting towards EVs, a global trend that Nepal has embraced.Sales of vehicles have surged in the EV segment, overshadowing traditional diesel, and petrol vehicles as banks have provided up to 80 per cent loan-to-value ratio for EV segments, according to Thapa.
"The demand can grow if the NRB reduces the risk weightage for vehicles costing above Rs 2.5 million, and provide substantial loans to interested customers. Banks across the globe, apart from those in Nepal, provide loans depending on the eligibility and financial stability of the customers as per their will, while our central bank has imposed policies and guidelines for every micro financial activity here," Thapa complained.
Sunil KC, chief executive officer of NMB Bank and president of the Nepal Bankers' Association, also remarked that the recent statistics show a significant decline in the import and demand of automobile vehicles in the country adding that the drop can be attributed to the growing attraction towards EVs among consumers, and the disparity in financing terms between fossil fuel-run vehicles and EVs.
"While 50 per cent equity is required for fossil fuel-run vehicles, EVs enjoy an 80 per cent loan-to-value ratio, making them a more attractive option. Additionally, new vehicle buyers are cautious, waiting to see how the market evolves. Nevertheless, EVs show promise, and banks are supporting them due to their eco-friendly nature and the need to control import and trade deficits," KC said.
He also shared that the commercial vehicle segment, in particular, has experienced a higher default rate, primarily due to the adverse impact of COVID-19 and the restrictions on transportation activities.
"Undergoing road construction projects have led to an increased reliance on air travel over road transports, affecting commercial vehicles from operating at full capacity leading to increased non-performing assets among the vehicle segments and further discouraging banks from financing them. The NADA auto show to be held in a few days, along with the onset of the upcoming festive season, is expected to boost demand, particularly for EVs. However, the reduced purchasing power of individuals and the current state of cooperatives might continue to dampen it," KC told THT.
Navigating challenges
Similarly, other banks are also aware of the market scenario of the country's automotive industry which is navigating a challenging period characterised by economic slowdown, evolving consumer preferences, and financing disparities between traditional and EV vehicles, and call for steps to address these issues which will be crucial to reviving the demand for vehicles in the country.
Binay Dahal, chief information officer for Kamana Sewa Bikash Bank, shared that the bank is also adapting to these changes by focusing on both commercial and EV vehicles.
"Defaults on commercial vehicles have risen, mainly because they cannot operate at full capacity. Demand remains low, particularly for commercial vehicles, as people are hesitant to buy in a slow market," he informed THT.
"To stimulate demand, it's crucial to provide more accessible loans. However, financing is just one part of the equation.
The economic slowdown and reduced income generation capacity have had a more significant impact on the decline in vehicle purchases. The upcoming festive season and increased financing options for traditional vehicles may help rekindle demand," he opined.
Also, Jayendra Bikram Shah, chief manager for Himalayan Bank, remarked that as demand for auto loans remains low, consumers are in a waitand-watch position.
"The growth of demand is still slow compared to the past but interest has increased towards EVs," he said. Shah also shared that banks are facing a challenging experience in financing commercial vehicles with an increase in their loan defaults. "Policy-wise, banks are financing up to 50 per cent for private vehicles, which some argue this is insufficient. Regarding commercial vehicles, we are proceeding with caution and have observed a significant decrease in demand. If the economic condition improves, we anticipate increased demand for automobiles, as they rank second to necessary items in terms of priority," he added.
Road ahead
Meanwhile, Gunakar Bhatta, spokesperson for the Nepal Rastra Bank, argued that the demand for hire purchase loans is currently very low and the issue is being faced across various sectors. As the total loans in the automobile sector amount to around two per cent of the total loans disbursed in the country, the issue is not a raging issue that can affect the financial stability of the nation, he said, adding that the central bank has taken steps to support the auto industry through the Monetary Policy.
"Through Monetary Policy, risk weightage has been reduced to 100 per cent for private auto loans up to Rs 2.5 million. For EVs, loan-to-value ratio is 80 per cent," he said.
Bhatta also explained that as a new age group has not entered the market due to the trend of youth going abroad and the slow development of the domestic employment market, it will take some time for the demand across sectors to grow.
"Demand for automobiles has naturally dropped, but it is expected to stabilise over time as new consumers enter the market. Many youths are going abroad, and existing vehicle owners are not looking for new products. Demand does not remain constant. It will rise when the new age groups enter the market and the job market develops. The changing trends and demands in the sector must be understood and acted upon accordingly."
The shift in the economic environment, increased migration among youths outside the country, and other factors have contributed to these changes, according to Bhatta.
A version of this article appears in the print on September 11, 2023, of The Himalayan Times.
