Business Standard

Coronavirus-driven lockdown will hurt Indian ABS performance


The economic disruption caused by a 21-day lockdown in India will hit the performance of the commercial vehicle and small and midsize enterprise (SME) loans in asset-backed securities (ABS), according to Moody's Investors Service.
On March 24, the government announced a nationwide lockdown of non-essential services to slow the spread of coronavirus.
The lockdown and the broader fallout from the virus' spread in India and around the world will significantly suppress India's economic activity. Moody's has forecast that India's GDP growth 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.
"This will severely constrain operators' abilities to earn income and repay commercial vehicle loans. Moreover, slowing economic growth will dampen demand for freight transport beyond the period of the lockdown."
Freight rates are declining. "We, therefore, expect loan delinquencies to increase for at least the next few months in commercial vehicle loan auto ABS deals," said Moody's.
Similarly, the lockdown will bring many SME businesses to a halt while slowing economic growth will constrain earnings and profitability through 2020. This will cause some SME borrowers to miss loan payments, pushing up delinquency rates in SME ABS for at least the next few months.
In addition to hurting commercial vehicle operators' financial capacities to repay loans, the lockdown will disrupt physical loan collections. For 40 to 60 per cent of loans in Indian auto ABS, borrowers make loan payments to collection agents in person.
The lockdown will disrupt such loan collections and the overall collections for the pools could drop significantly.
ABS transaction will use loan collections for March and April -- the period of the lockdown -- to fund payments to investors in April and May respectively.
If there is a shortfall between loan collection and investor payout amounts, ABS deals will draw on cash collateral and excess interest spread to meet the monthly investor payouts.
Most Indian ABS transactions pay both interest and principal to investors on a predetermined periodic basis. Hence, transactions face greater liquidity risk.
Assuming no collections for our rated Indian ABS, deals' cash collateral can cover investor payouts over the next two to three months at the least, but this could be insufficient in the event of prolonged loan collection disruptions.
Severe loan collections disruptions in addition to constraints on new funding will adversely affect the liquidity profiles of originators or servicers.
If liquidity issues become large enough to hurt originators' or servicers' viability, this will pose an additional risk to loan collections and therefore Indian ABS, said Moody's.

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First Published: Mar 30 2020 | 1:10 PM IST

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