Moody's: Structured finance transactions to continue strong performance in 2018, despite some weakening in underwriting
Moody's Investors Service says that India's structured finance market will show a varied performance in 2018, with some stress evident in asset-backed securities (ABS) deals backed by loans against property to small- and medium-sized enterprises (SMEs) following the introduction of a goods and services tax (GST) in July 2017. However, auto ABS backed by commercial vehicles loans will remain stable on the back of healthy domestic economic growth.
Moody's Indian affiliate ICRA also says that the country's microfinance sector is on the road to resurgence after suffering a setback due to demonetization. Collection ratios that were at high levels of 99%-100% prior to demonetization declined to around 87% in December 2016, but have steadily improved since then and stood at around 94% as of September 2017. A similar trend has also been observed in ICRA-rated micro loan securitization transactions.
According to ICRA, such loans are and will remain supported by the nature of their underlying collateral (largely self-occupied residential property), the absence so far of any steep correction in property prices, and moderate loan to value ratios (LTVs).
"We expect delinquency rates for commercial vehicle loans backing outstanding auto ABS to remain stable at around 5.4% for loans on new vehicles and 6.8% for loans on used vehicles in 2018, supported by healthy domestic economic growth," says Dipanshu Rustagi, a Moody's Assistant Vice President and Analyst.
"Meanwhile, delinquency rates in ABS deals backed by loans against property to SMEs will increase in 2018, because of the tougher operating environment for SMEs," says Rustagi. "The introduction of a GST in July 2017 and the government's demonetization policy have placed stress on the SME sector".
According to Moody's, Indian auto ABS backed by commercial vehicle loans issued in 2018 will, like outstanding transactions, have positive credit characteristics that -- along with healthy economic growth -- will support the performance of these deals.
In particular, loan portfolios backing new deals will have sufficient geographic and borrower diversification, while the underlying loans will have fully-amortizing repayment LTV ratios of around 65%-70% for used vehicle loans and 80%-85% for new vehicle loans.
Auto ABS backed by commercial vehicle loans account for around 45% of the total volume of outstanding ABS in India, and Moody's expects that such deals will continue to account for a significant proportion of issuance in 2018.
Finally, the credit quality of new Indian ABS backed by loans against property to SMEs will benefit from the more stringent underwriting standards applied by lenders over the past year, says Moody's.
These standards reflect a more cautious approach by lenders in view of rising delinquencies and the subdued operating environment for SMEs.
ICRA says the Indian microfinance sector is seeing an improvement in asset quality as it recovers from the effects of demonetization.
"There is a visible improvement in asset quality across all locations, except the Vidarbha region in Maharashtra State and some districts in Madhya Pradesh. Several micro-finance institutions have reported over 98% collection ratios for the loans originated in calendar 2017. Consequently, the fresh slippage of loans into softer delinquency buckets has been arrested and non-performing asset levels seem to have peaked," says Vibhor Mittal, Head -- Structured Finance at ICRA Ratings.
According to ICRA, various factors have helped curtail the 0+ days past due rates from a peak of around 23.6% as of February 2017 to around 17.9% as of September 2017.
These factors are enhanced customer connections, focused collection efforts in laggard areas, and borrower awareness programs conducted by various micro-finance institutions and self-regulatory organizations, especially on the importance of clean track records at credit bureaus for the purposes of securing incremental funding.
While the 90+ days past due rate has remained persistently high so far (around 11.7% as of September 2017), it is expected to fall in calendar 2018, as the share of post-demonetization disbursements in the portfolio rises and the past delinquent contracts are written-off.
With some easing seen in the credit discipline associated with the joint liability group model, ICRA expects annualized credit costs in the micro-finance institutions asset class to stabilize at 2.5%-3.5%. However, given the marginal income profile and politically sensitive nature of the related borrower segment, asset quality will remain volatile and susceptible to one-off events.
ICRA further says that the gross non-performing asset level in the housing loan portfolios of housing financing companies stood at around 0.6% as of September 2017. The sector can be segmented into two broad categories: traditional housing loans and affordable housing loans, which are small housing loans provided to low income borrowers.
While asset quality remains robust in the traditional housing segment, the non-performing assets in the affordable housing segment have inched up in recent times to around 1.8% on an average as of September 2017.
ICRA-rated housing loan pools have also exhibited a strong performance with collection ratios largely observed in the range of 98% - 100% for the traditional housing loan pools and 94% - 96% for the affordable housing loan pools during the past year or so.
The average loss cum 90+ days past due level in the affordable housing loan pools though low at around 2.6% as of September 2017 was nearly seven times the level observed for traditional housing loan pools.
"Factors like favorable demographics (young working population with rapid nuclearization of families), strong latent demand and the accommodative policy of the government will continue to provide impetus to the housing sector", says Mittal.
"While asset quality is expected to remain stable in the traditional housing segment, delinquencies could further build up in the affordable segment in calendar 2018. This would be driven by factors like intensifying competition -- resulting in some easing in lending standards -- and a higher share of lending to the self-employed segment", says Mittal.
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