Fitch raises outlook for India auto loans to 'neutral' from 'deteriorating'

Economic recovery supports stable asset performance

Rating agency Fitch Ratings has revised outlook on Indian auto loans to from 'deteriorating' to 'neutral' due to stable asset performance that is supported by economic recovery.

The average arrears in the 90-plus days past dues (DPD) bucket for rated asset backed securities (ABS) fell from a peak of 1.9 per cent in June to just one per cent in September. While risks from the new wave of Covid-19 infections remain, any stress is expected to be temporary and less severe than seen in FY21.

The operating environment for the commercial vehicle (CV) sector, which comprises a major part of the Fitch rated portfolio, has improved in line with economic activity. The second shock proved to be a short-lived disruption and has not derailed the overall recovery of the CV sector from the pandemic’s lowest point. Fitch expects the economic recovery in 2022 to remain supportive of the sector.

The agency forecasts Indian GDP to grow by 8.4 per cent in the financial year ending March 2022 (FY22), followed by 10.3 per cent growth in FY23, recovering from a contraction of 7.3 per cent in FY21. The economy has rebounded quickly from the second wave, with some economic indicators, including mobility indices, recovering to close to pre-pandemic levels.

Fitch expects delinquencies to remain slightly elevated compared with pre-pandemic levels, with the risk of higher volatility from a renewed surge in cases.

The recent emergence of the Omicron variant adds uncertainty to the economic recovery and a more severe economic disruption than we expected from new waves could return our sector outlook to deteriorating.

The rating Outlook on all of currently rated Indian ABS is Stable. The transactions benefit from a simple sequential structure where the credit enhancement typically increases rapidly during the transaction life. The underlying assets also tend to perform much better than the overall books of the originators due to the stricter pool selection criteria. These features provide additional buffers against a deterioration in asset performance, Fitch said.