Collection levels from Indian asset-backed securities (ABS) transactions, or pooled loans, remain badly affected by the coronavirus pandemic, but the scale of the shock has subsided in recent months, Fitch Ratings said on Friday. Since April, collection rates have gradually risen, and, in July, they reached around 52% of December 2019-levels. Nevertheless, collection rates continue to vary among originators, the firm said in a report.
The conclusion of the six-month moratorium at the end of August will spur a further sharp improvement in collection rates in the next few months, the rating agency said. As the impact of Covid-19 began to be felt in India, and the moratorium was introduced in March, collection rates for loan pools, rated by Fitch, had dropped sharply, reaching just 13% of December 2019- levels on an average in April.
“The recovery in collection rates has been faster than we previously expected, as we had assumed that most borrowers would take advantage of the payment holiday. The improvement partly reflects the easing of India’s strict lockdown in May,” Fitch said. Its rated transactions involve commercial-usage auto loans that are repaid mainly from the earnings of vehicles, so restrictions on mobility can have a particularly serious impact on repayment abilities.
Analysts at Fitch said high interest rates were another reason that borrowers had resumed repayments, despite most of them applying for the moratorium. Interest charges have continued to accrue during the moratorium period, so better-off borrowers may have opted to resume payments to avoid paying more in the longer term.
“Nonetheless, we expect collection rates to range between 80% and 90% of December 2019 levels over the rest of 2020, once the payment holiday is over,” the credit rating agency said in the report. These estimates reflect the broad-based economic stress as a result of the pandemic, which will continue to impair repayment capacity for many borrowers. Fitch expects India’s economy to contract by 5% in FY21. Although it expects growth to recover to 8% in FY22, the improvement would largely reflect the effects of a low base. There remains a high level of uncertainty around the forecast and downside risks are prominent, the rating firm said.
Among the underlying vehicle types, tractor loans have the best collection performance as agriculture has been less affected by the pandemic than other parts of the economy. Excluding tractors, average collection rates over the April-July period were broadly similar across loans for other vehicle types in Fitch’s rated transactions’ portfolios.
All Fitch-rated Indian ABS transactions remain on rating watch negative. In the vast majority of cases, the agency expects to affirm the ratings if it receives sufficient evidence that cash collateral is adequate to provide credit as well as liquidity support at a level commensurate with existing ratings. Further, it will also look to ensure that timely access to the designated cash collateral will not be frustrated should the originator in any transaction default.
If the transactions continue to perform in line with current assumptions, including a build-up of credit enhancement, existing ratings will find support. “However, any significant performance deterioration could lead to negative rating action. Transactions with limited seasoning and credit enhancement buffers would be most vulnerable to a downgrade,” Fitch said.