Auto-backed loan repayment returns to pre-demonetisation level: Moody's

Report said improvement in collections allowed auto ABS deals to replenish their credit facilities

Loan repayment collections in auto asset-backed securities (ABS) improved in February, returning to pre-demonetisation levels, says a report by Moody's Investors Service.

The report said improvement in collections has allowed auto ABS deals to replenish their credit facilities, in cases where these credit facilities were used to fund investors payouts in the immediate aftermath of demonetisation.

"The collection of repayments on the loans in Indian auto asset-backed securities (ABS) improved in February, returning to levels that occurred prior to the government's decision to remove a high proportion of currency notes from circulation (demonetisation) in November 2016," it said.

At the same time, auto ABS delinquencies increased in February 2017 after a slight improvement in December 2016 and stabilisation in January 2017, but will decline back to pre-demonetisation levels by June if economic activity continues to pick up and oil prices remain in a range between $40 to $60 a barrel, Moody's said.

"Delinquencies had increased in the wake of demonetisation because the decline in economic activity triggered by the policy resulted in a loss of income for some commercial vehicle operators, causing them to miss auto loan repayments," Moody's Analyst Vincent Tordo said.

However, measures of economic activity in India — such as manufacturing, services and industrial production activity — now appear to have bottomed post the government's action in November last year, Tordo added.

Moody's said commercial vehicle loan originators often attempt to persuade borrowers to sell their vehicles and repay their loans if the vehicles are not being used intensively.

"Such a development may have occurred in the aftermath of demonetisation, thereby pushing up the prepayment rate. Given the circumstances that drive prepayments in India, prepayment rates can be volatile and do not necessarily reflect improving performance," it added.