Moody’s which reported stable collection rates for auto-loan asset-backed securities (ABS) rated by it in the
quarter ended March 2021, sees them falling over the next three to six months.
The collection rates were similar to the pre-Covid levels in the March quarter, according to a report. Delinquency rates were also similar in the March quarter over the previous quarter.
The delay in the country’s economic recovery, rise in fuel prices is hurting the commercial vehicle segment. This will hit the performance of asset-backed securities backed by commercial vehicle loans, according to a report by Moody’s Investors Service earlier this month.
“Slowing economic activity in India due to the second wave will constrain commercial vehicle owners’ capacity to pay auto loans. As a result, commercial vehicle loan delinquencies will increase in India and collection rates will remain below March levels over the next three to six months,” according to Moody’s.
Sluggish economic activity will dampen demand for goods transportation and lower freight rates. This will reduce commercial vehicle operators’ incomes, and therefore, their ability to repay auto loans, the agency said.
Furthermore, fuel costs are rising following a depreciation of the rupee and state and central fuel tax changes, which have hiked up commercial vehicle operators’ costs and will further constrain their loan-repayment ability.
Cash reserves, excess spread and transaction structures will mitigate risks. The Indian asset-backed securities that Moody’s rates benefit from non-amortising cash reserves and substantial excess spread, providing liquidity and buffers against losses. Most deals also have timely interest and ultimate principal structures, which provide additional protection against liquidity risks.
Second wave harsh
The impact of the first Covid wave was cushioned with multiple measures such as regulatory moratorium, loan restructuring, additional funding through the emergency credit line guarantee scheme. Also, a sharp pent-up demand recovery raised optimism about faster-than-expected normalisation, according to India Ratings.
However, the outcome may be different during the second wave, due to the wide-scale impact, including rural areas and pent-up demand being absorbed already.
With reduced borrowers’ savings and rising operating costs due to fuel inflation, the excess capacity had its offsetting impact on freight contract renewals or market freight rates, all impacting borrowers’ cash flows.
Early demand indicators, such as the E-way bill, diesel consumption are showing signs of moderation and asset inflation (rising raw material prices like steel and cement) would impact demand offtake and thus load availability.
Thus, both demand and rising operating costs would moderate borrowers’ cash flows in the financial year 2021-22.
“Lenders’ collection efficiency would also be affected by restricted mobility as the second wave has spread across all geographies, the agency said, adding it has a negative outlook on commercial vehicle finance as an asset class.
There are emerging trends of rising loan tenures across vehicle financiers to reduce servicing burden for borrowers, however, these could lead to a rise in loss given defaults for collaterals.