Auto loan delinquencies to stay elevated for 3-6 months in India: Moody's

While economic conditions have improved, this year's virus outbreak has eroded borrowers' financial reserves, according to Moody's

Auto loan delinquencies are expected to stay elevated for three to six months in India despite the pick up in economic activity after easing of curbs imposed to contain the spread of the Coronavirus (Covid-19) pandemic.

While economic conditions have improved, this year’s virus outbreak has eroded borrowers’ financial reserves, according to rating agency Moody's.

Moody's said that over the next three to six months, it expects delinquency rates to stay elevated at around current levels as many borrowers continue to deal with the pandemic's economic after-effects. Fuel costs are also high, adding to pressures on borrowers.

Delinquency rates will stabilise at high levels as coronavirus restrictions ease. The delinquency and collection rates for Indian auto asset backed securities (ABS) improved in June and July as economic activity picked up after coronavirus restrictions eased.

The cash reserves, excess spread and transaction structures would mitigate risks. The Indian auto ABS benefit from non-amortising cash reserves and substantial excess spread. These features mitigate risks from elevated delinquency rates for Indian auto ABS, because they provide deals with liquidity and buffers against losses, Moody's added.

The outlook for auto ABS performance would worsen if India's coronavirus situation deteriorated again and disrupted the country’s recovery trajectory, particularly if there were renewed lockdowns that halted commercial vehicle operators’ businesses.

For the Indian auto ABS that Moody's rates, excess spread is high as the weighted average asset-side interest rate ranges between 10.5 per cent and 21.4 per cent. But, the coupon rates (yield or interest) to investors ranges between 5.6 per cent and 9.4 per cent.

Cash collateral coverage is improving and averages between 48.5 per cent and 55.1 per cent of the outstanding principal on deals' pass-through certificates, depending on the deal origination year.

Most deals also have timely interest and ultimate principal structures, which provides additional protection against liquidity risk, it added.