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The pick-up in economic growth in India is positive for asset-backed securities (ABS), as it supports the ability of borrowers to earn income and repay their loans, Moody's Investors Service said today.
"Auto ABS delinquency rates will remain stable at current levels through 2018, but delinquency rates for small and medium size enterprise ABS backed by loans against property will continue to rise, despite the higher economic growth in India," Moody's Analyst Vincent Tordo said.
Moody's expects that the Indian economy to grow at 7.6 per cent in 2018 compared to 6.2 per cent in 2017.
"The stronger growth will support the ability of borrowers to earn income and repay loans backing ABS deals, including auto loans and loans against property to micro, small and medium enterprises (MSMEs)," Moody's said.
On Indian auto ABS, Moody's said they are mainly backed by commercial vehicle loans that will benefit from higher demand for the transportation of freight, as economic growth picks up. The improved demand to move freight will increase the CV operators' revenues and therefore improve their ability to repay auto loans.
"And, while rising fuel costs will moderate the benefit of improving economic growth for CV operators, overall, auto ABS delinquency rates should stay stable throughout 2018," Tordo added.
Moreover, the pick-up in economic growth will support domestic consumption in India. Such a situation is positive for loan against property borrowers, who typically own MSMEs that are highly dependent on consumer demand.
"However, delinquency rates for SME ABS will continue to rise in 2018 from the levels in 2017, because of the ongoing disruption to the MSME sector caused by the goods and services tax (GST)," Moody's noted.
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