Auto loans delinquency set to stabilise

Delinquency rate for vehicle loans, the most affected due to the pandemic is set to stabilize as coronavirus restrictions ease. Early trends for the September quarter from banks and NBFCs show that auto loan delinquency and collection rates improved in the quarter. But it could remain elevated versus pre-pandemic levels as borrowers face eroded financial reserves.

Auto asset-based-securities ( ABS) performance improved because of the pickup in economic activity over recent months raised demand and rates for goods transportation. Improving conditions for goods transportation are positive for the Indian auto ABS sector, because deals mostly securitize loans to commercial vehicle operators who earn income by moving freight, global ratings firm Moody’s said.

Median monthly collection ratios (MCR) for commercial vehicle pools for the August 2021 pay-out touched 100%, almost in-line with the April 2021 pay-out MCR of 101%, ratings firm Crisil said.

Vehicle loans were the second largest pool of assets to be securities through the combined route of pass through certificates as well as direct assignments accounting for 29 per cent of the securitised pool during the first half of FY’22 for Care Ratings.

There is however a caveat. “This year’s virus resurgence has eroded borrowers’ financial reserves ” said Dipanshu Rustagi, a Moody’s Assistant Vice President and Analyst. “We expect delinquency rates to remain elevated at around current levels over the next 3-6 months as they deal with the economic impact of the outbreak”

The outlook for auto ABS performance would worsen if India’s coronavirus situation deteriorated again and disrupted the country’s recovery trajectory, particularly if there were renewed lockdowns that halted commercial vehicle operators’ businesses, Moody’s said.

Yet, the Indian auto ABS that Moody’s rates benefit from non-amortizing cash reserves and substantial excess spread. These features mitigate risks from elevated delinquency rates for Indian auto ABS, because they provide deals with liquidity and buffers against losses, said a Moody’s report . This is because the weighted average asset-side interest rate ranges between 10.5% and 21.4%, whereas the coupon deals pay to investors ranges between 5.6% and 9.4%. Besides, most deals also have timely interest and ultimate principal structures, which provides additional protection against liquidity risks, it said.

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