Hong Kong/Singapore: Rising fuel prices could strain India’s commercial vehicle operators and lead to a rise in auto-loan delinquencies, says Fitch Ratings.
That said, the upbeat economic outlook suggests operators may find it easier to pass increased costs on to customers than during previous fuel-price spikes.
Delhi diesel prices averaged INR67.4 per litre in June, which was 26% higher than a year earlier and up by more than 50% on January 2016. Upward pressure has stemmed from the recovery in global oil prices and depreciation in the Indian rupee, which has fallen by almost 7% against the US dollar since the start of the year. Our baseline assumption is that global oil prices will remain high over the rest of 2018, while further rupee depreciation is a risk amid US monetary tightening. India is also facing US pressure to reduce its oil imports from Iran, which could further stoke Indian fuel prices.
Freight rates have so far not kept pace with fuel-price increases, rising by less than 15% since January 2016. This is causing stress for commercial-vehicle operators, for whom fuel accounts for a significant proportion of overall costs. Commercial vehicle loans make up almost all of the pools in our Indian auto asset-back-security (ABS) portfolios. Most borrowers in these pools are small operators that depend directly on their vehicles for income, and some could find it difficult to make repayments if their margins continue to be squeezed.
The last fuel-price increase of comparable size was from mid-2012 to mid-2014, when prices rose by just over 40%. It led to 90+ days past due auto loan delinquencies jumping to around 2x-3x of pre-2012 levels for the majority of originators (see chart), making it the most stressful period for Indian auto loans in the last 10 years.
Most auto-loan originators have become more cautious since the 2012-2014 delinquency spike, setting tighter financing limits on some vehicle types and picking niche market segments where they see lower risks, which may improve portfolio resiliency. Most Indian auto-loan ABS originators are not captive subsidiaries of automakers, giving them more flexibility to be selective than counterparts in other jurisdictions.
India’s current robust economic environment should also help by supporting freight demand and making it easier for commercial-vehicle operators to pass through increased costs to customers. Fitch expects the economy to continue picking up over the next two years, with GDP forecast to grow by 7.4% in fiscal year ending March 2019 (FY19) and 7.5% in FY20, up from 6.7% in FY18. Economic conditions were more challenging over 2012-2014, with GDP growth averaging 6.4% during the period, compared with 8.5% in the previous three years.
Nevertheless, there are risks to the economic outlook, such as from global monetary tightening and trade protectionism, and there is always likely to be a lag before costs are fully passed through, even in benign conditions.