vehicle: delinquencies on auto loans should stabilize

The delinquency rate for auto loans, the hardest hit due to the pandemic, is expected to stabilize as coronavirus restrictions ease. Early trends for the September quarter from banks and NBFCs show auto loan default and collection rates improved in the quarter. But it could remain elevated from pre-pandemic levels as borrowers face eroding financial buffers.

The performance of self-asset-backed securities (ABS) has improved due to the pick-up in economic activity in recent months and rising demand and freight rates. Improving freight transport conditions are positive for India’s automotive ABS sector, as the deals mainly securitize loans to commercial vehicle operators who earn revenue by transporting freight, said global ratings firm Moody’s. .

Median monthly collection ratios (MCRs) for utility vehicle pools for the August 2021 payment reached 100%, almost in line with the April 2021 payment MCR of 101%, ratings firm Crisil said. .

Auto loans were the second largest pool of assets to be securities through the combined route of pass certificates as well as direct assignments accounting for 29% of the securitized pool in the first half of FY22 for Care Ratings.

There is, however, a caveat. “The resurgence of the virus this year has eroded the financial reserves of borrowers,” said Dipanshu Rustagi, assistant vice president and analyst at Moody’s. “We expect crime rates to remain elevated at around current levels for the next 3-6 months as they deal with the economic impact of the outbreak.”

The outlook for automotive ABS performance would worsen if the coronavirus situation in India deteriorates again and disrupts the country’s recovery trajectory, especially if there are further shutdowns that interrupt the activities of vehicle operators utilities, Moody’s said.

Still, Indian auto ABS than Moody’s rates benefit from non-amortizing cash reserves and a substantial excess spread. These features mitigate the risks associated with high delinquency rates for Indian auto ABS as they provide transactions with liquidity and buffers against losses, a Moody’s report said. Indeed, the weighted average interest rate on the asset side varies between 10.5% and 21.4%, while the coupon offers paid to investors vary between 5.6% and 9.4%. In addition, most transactions also have timely interest and ultimate principal structures, which provide additional liquidity risk protection, he said.