Coronavirus lockdown will hit asset-backed securities' performance: Moody's

Auto loan delinquencies to rise in the coming months

Rating agency Moody's Investors Service says the nationwide lockdown in India will adversely impact the performance of the commercial vehicle and small and medium-sized enterprise (SME) loans in asset-backed securities (ABS).

Asset-backed securities are a kind of instrument where the underlying loan pool and income stream are packaged and often rated for strength. Most assets in rated Indian ABS are commercial vehicle and SME loans.

With the three-week lockdown till April 14, the activity in the transport sector and businesses has almost come to a halt, reducing income and repayment abilities.

The lockdown will also hamper physical loan collections, with in-person collection still accounting for around 50 per cent of repayments in many deals. Transport and businesses to fall to a halt, reducing income and repayment abilities, Moody’s said in a statement.

At present, Indian ABS deals' cash collateral is sufficient to cover investor payouts over the next few months. But this could change in the event of prolonged loan collection disruptions.

The lockdown and broader fallout from the coronavirus' spread in India and globally will significantly slow economic activity. Moody's expects India's economic growth (Gross Domestic Product – GDP) will slow to 2.5 per cent in 2020 before rising to 5.8 per cent in 2021.

"For commercial vehicle operators, the lockdown will shut off the transport of non-essential freight, and severely constrain operators' ability to earn income and repay their loans," says Dipanshu Rustagi, a Moody's Assistant Vice President and Analyst.

Moreover, slowing economic growth will dampen demand for freight transport beyond the period of the lockdown, while freight rates are also declining. Moody's, therefore, expects loan delinquencies to rise for at least the next few months in commercial vehicle loan auto ABS deals.

"Similarly, the lockdown will bring many SME businesses to a halt, while slowing economic growth will constrain earnings and profitability through 2020," adds Rustagi. "This will cause some SME borrowers to miss loan payments, pushing up delinquency rates in SME ABS for at least the next few months."

The lockdown will also disrupt physical loan collections, with 40%-60% of loan payments in Indian auto ABS collected in person. Similarly, a deterioration in the credit profiles of loan originators or services could also hamper their ability to collect loan payments.