Fitch raises outlook for Indian auto loans from ‘neutral’ to ‘deteriorating’

Ratings agency Fitch Ratings has revised the outlook on Indian auto loans from “deteriorating” to “neutral” due to stable asset performance supported by the economic recovery.

Average arrears in the 90+ day past due tranche for rated asset-backed securities (ABS) fell from a high of 1.9% in June to just 1% in September. While risks from the new wave of Covid-19 infections remain, any stress should be temporary and less severe than that seen in FY21.

The operating environment for the commercial vehicle (CV) sector, which comprises much of the portfolio rated by Fitch, has improved in line with economic activity. The second shock proved to be a short-lived disruption and did not derail the overall recovery of the CV sector from the low point of the pandemic. Fitch expects the economic recovery in 2022 to continue to support the sector.

The agency forecasts India’s GDP to grow 8.4% in the fiscal year ending March 2022 (FY22), followed by 10.3% growth in FY23, recovering from a contraction of 7.3% in FY21. The economy rebounded quickly after the second wave, with some economic indicators, notably mobility indices, returning to levels close to pre-pandemic levels.

Fitch expects delinquencies to remain slightly elevated from pre-pandemic levels, with the risk of higher volatility due to a further rise in cases.

The recent emergence of the Omicron variant adds uncertainty to the economic recovery and a more severe economic disruption than we expected from the new waves could cause our sector outlook to deteriorate.

The outlook rating on all currently rated Indian ABS is stable. Transactions benefit from a simple sequential structure where credit enhancement typically increases rapidly over the life of the transaction. The underlying assets also tend to perform much better than the entire originator books due to the stricter pool selection criteria. These features provide additional buffers against deteriorating asset performance, Fitch said.

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