IL&FS default shows ABS servicer continuity risk: Fitch

Recent defaults by Infrastructure Leasing and Financial Services (IL&FS) have highlighted the continuity risks of the country's asset-backed security (ABS) servicers, Fitch said in its report Thursday.

It further said the failure of IL&FS has significantly undermined market sentiment towards the the country's non-bank financial institution (NBFI) sector and their ABS issuance.

Transaction flow has stalled and there is a rise in yields on the securitisation notes of NBFIs, it added.

IL&FS and its subsidiaries are facing liquidity crisis and have defaulted on several debt repayments recently.

According to the rating agency, IL&FS was not itself a counterparty to any internationally rated ABS notes, but NBFIs act as the originators and servicers for most Indian ABS transactions.

"Prolonged and severe stress of a transaction's servicer can disrupt collections on the underlying assets, undermining liquidity," the report said.

The rating agency's rated ABS transactions in the country have liquidity coverage of at least three months, which reflects it's expectation that this length of time could be needed to replace a servicer in a stress scenario.

"This liquidity requirement increases in cases where we believe servicer continuity risk is particularly high or that the servicer replacement time is likely to be longer," the report said.

The rating agency, however, said the underlying asset performance of it's rated ABS pools remains sound.

The delinquencies for these transactions have remained stable at below 1.5 per cent on average, it said, adding but performance varies according to the originator and the underlying asset class.