Slowdown speeds up CV loan defaults

Loans taken in 2004 show the highest default rate, says ICRA.

The downside of the credit boom that began in 2004, especially in the commercial vehicle (CV) segment, is becoming visible. Loans granted to the segment between 2004 and 2006 have shown higher defaults as truckers felt the pressure of the economic slowdown, according to a study by rating agency Icra.

The loans securitised between January 2004 and December 2006 have shown progressively lower collection efficiency and hence, higher delinquency levels. In fact, among all the years, the pools securitised in 2006 have shown the weakest performance, the rating agency said.

The loan pools from 2007 and 2008 are clearly superior to those from 2005 and 2006. Given the relatively higher collection efficiency for these loan pools, the use of credit enhancement corpus has also been low to moderate. The liquidity crunch in the financial system, particularly in October-December 2008, adversely affected collections on retail loan pools, it said.

Elaborating the distinct trend in loan repayment performance, Kalpesh Gada, head (structured finance products) at Icra, said the business environment in the CV industry till the end of 2006 was qualitatively different from than the one in 2007 and 2008.

In 2006, the economy cycle was in the upward growth mode and the demand for transportation was high. As the interest rates were low, the volume of loans extended to truckers was high. Gada said many small fleet operators took loans to expand business. The lending norms (assessing the credit worthiness of customers) remained relatively weak during this period.

However, there was a change in the interest rate cycle from early 2007. The lending rates began to harden and bankers also became cautious on the pace and quality of lending by tightening norms.

A senior public sector bank official said the financial crisis in 2008 and economic slowdown hit the transporters. While demand slumped and incomes dipped, the obligation for repayments remained intact.

Some small fleet operators (the most vulnerable lot) began to default on payments, he added. The rating agency has analysed the performance of CV pools securitised between CY04 and CY08.