Indian small auto borrowers face more short-term pressure
Demonetisation has disrupted economic activity – particularly in the informal sector – and is likely to have hit borrowers’ incomes. — Fitch Ratings
Hong Kong/Singapore: Demonetisation appears to have had a negative impact on Indian auto-loan repayments, based on collection reports from Fitch-rated securitisation transactions. Small auto-loan borrowers have been affected the most. Demonetisation is likely to have had a detrimental effect on the income and cash flows of commercial vehicle operators, which could continue to feed through into repayments in the next few months, but Fitch-rated Indian ABS transactions have sufficient external credit enhancement to cover the likely short-term impact. We do not expect ratings to be affected.
The collections (as a percentage of investor payment obligations) of Fitch-rated ABS transactions dropped by an average of around 100bp in November 2016 (the first month of demonetisation), to 101.5% from 102.5% in October. Fitch has received December 2016 collection data for around 40% of its rated transactions, which points to a further average drop of 60bp.
Borrowers were initially permitted to use demonetised notes for loan repayments, which helped in managing collections in November. However, demonetisation has disrupted economic activity – particularly in the informal sector – and is likely to have hit borrowers’ incomes. It is possible that collections will fall further in early 2017, and we believe it could take at least another two to three months before for collections to return to normal.
The cash shortage has affected used-vehicle operators – which generally have weaker credit profiles – more than the new-vehicle borrowers. Pools backed predominantly by used-vehicle loans saw an average drop in collections of 130bp in November 2016. Those with a higher concentration of light and small commercial vehicles, which again have relatively weaker borrower credit profiles compared with medium and heavy vehicle owners, also dropped significantly – by almost 200bp.
The collection of pools securitised in 2016 fell by an average 120bp compared with 80bp for pools securitised before 2016. More seasoned pools are on average likely to have more experienced borrowers, with a stronger ability to meet their repayments. Furthermore, borrowers in seasoned pools will on average have serviced their loans for longer and have higher equity than those in less seasoned pools, leading to a greater willingness to pay.
Fitch-rated auto-loan ABS transactions remain resilient to a drop in collections. Only four transactions made any utilisation of credit enhancement in November 2016. All Fitch-rated transactions are currently able to withstand a 30% drop in collections for a minimum of eight months and an average of 22 months.