With banks tightening lending norms, many big automobile dealerships may go belly up
Banks are tightening the way they handle bad loans, especially big loans to the corporate sector. How will this impact loans for buying new and used cars? One aspect, of course, is the way loans to individuals and companies will get tightened. Simply, this means more paperwork and, probably, better service as systems and methods get streamlined and more of the work goes online.
But more impactful than that will be the way banks and other financial institutions lend money to automobile dealers. As on date, dealers place orders on manufacturers, usually against the deposits held by the manufacturers, and repay them using funds either raised internally or borrowed externally. They then hold these stocks waiting and hoping for customers to arrive and pick up specifically those models, variants and colours; otherwise, they end up holding those stocks for an even longer time.
In effect, the dealer becomes more like a financier to both the manufacturer as well as to the market; and, for both sides, there is a price to pay by way of cost of money deployed. Rarely, any more, are these funds from internal accruals. More often than not, these funds are picked up at a cost against collaterals and guarantees.
Where multiple banks and lenders are involved, as well as market borrowings, the game also involves using spare money for making market loans. Borrow money from banks at lower rates and lend money out or invest in assets other than rolling stock, to try and earn more.
All this is coming to an end now, for multiple reasons. The game of borrowing money multiple times against the same assets and then playing that money in the informal market is not happening as easily now as it used to.
- Banks are sharing information on who has borrowed what against what collateral. Trying to pledge the same asset multiple times is not as easy now as it used to be in the past, especially for stressed and bad loans, since information on debts going bad is now increasingly in the public domain.
- Assets, like real estate, have dropped in value alarmingly, especially where they were overvalued in the first case, and that is also worrying the banks and lenders. At the same time, sales are not exactly setting the house on fire; so income is also down. Double jeopardy.
- Predicting what the customer wants is not easy, especially for dealers who have emerged from families where monopolies and shortages directed the way of doing business. Many of us will recall a day and age, not long ago, when we were not even allowed to have a choice of colours.
- Most of all, the rapid move by some manufacturers towards direct sales, whether to fleet and bulk purchasers on special deals or to individuals online, is changing the whole game. One prediction that I have come across by a prominent global manufacturer is that over 67% of automobile sales in India by the end of 2016 will be from non-dealers, using either online sales, fleet sales or through ‘direct sales agents’.
Way back, in the mid-1990s, I had paid almost the full amount upfront for a brand new car to a prominent new car dealer in New Delhi, who subsequently went bottom-up due to a family and friends dispute. For a while, there was huge tension, because we were really not going to be able to afford such a huge loss. Besides, this was like outright daylight robbery and everybody around me was telling me to forget about it.
The manufacturer in question had an almost total monopoly then and, initially, did not even respond to queries from people, telling them that this was a matter between the dealer and the customer. They placed a small 2-column by 5-centimetres advertisement in the newspaper and that was it.
Those were early days for me as a writer. So, along with a few other victims, we notched it up in the media. One of the people impacted was a prominent lady columnist, well known for her sharp tongue and wit, who shared my surname. A long story after that. But, eventually, the manufacturer transferred the booking amounts to other dealers in town and we got our cars.
What will we do today if the dealers who have collected booking amounts or even full payments go belly up, or worse, have their stocks and assets seized by lenders and banks? Think about it—this has happened with airlines in the not so distant past. And it is my sense that something in the automobile industry is round the corner too.
This sense is based on two specific instances of automobile dealership chains, sales and service (who I know personally) are running around trying to raise money to save their homes from being auctioned off as their bad debts rise. Both of them, I may add, were darlings of the mainstream media until not too long ago. And I don’t see the manufacturers standing behind them, either.
Intent & Execution
A leading manufacturer got in touch with me through informal channels, bypassing their own internal corporate communications and PR types, to discuss what they could do to really work towards customer satisfaction. I said, ‘OK, I am riding a train to a ‘B’ town on some non-motoring kind of work, and we can talk on the way up and back,’ to which they agreed. ‘Please keep this meeting under wraps, nobody should know.’ To which they said, OK, and sent a senior gentleman to meet.
‘Bring along your internal SOP (standard operating procedures) for handling customer after-sales,’ I told them. On which they, kind of, sounded uneasy. So I said, ‘sorry, no SOP, no meeting.’ So anyways, they brought it along, a loaded soft-copy onto a laptop, and I sat and read it with them on the way.
I have seldom seen a document so good in intent and, yet, so lousy in actual execution. Every step and every process involved the dealer and a call centre and appeared to have been designed to shield the manufacturer from actual interaction with the end-user, the customer. And this was from a company which globally is known to be extremely proactive in interactions with actual end-customers.
‘Can you make these SOPs open domain so that even your customers know what to expect?’ I asked them. I was told, ‘sorry, that will not happen.’ ‘Why not?’ I asked them. They told me that the Indian customer is not mature enough as yet. I have lost count of how many times I have heard this: ‘Indian customer is not mature enough’ kind of patronising stuff from manufacturers and I don’t get angry about it anymore.
‘How about releasing this document to your customers, and that also in a choice of English or major regional languages? I asked. ‘May not happen,’ I was told.
‘Then, that’s the end of trying to understand and solve customer satisfaction in India,’ I told them, ‘because it appears to me that you are married to your dealers.’
Epilogue: On the way back, they offered to drop me from the station to my home. I agreed and went outside with them. Sure enough, the car they offered had been sent from a dealer, with my name and address on a board. So much for confidentiality! I took the Metro home instead.
(Veeresh Malik started and sold a couple of companies, is now back to his first love—writing. He is also involved in helping small and midsize family-run businesses re-invent themselves.