Commercial vehicle (CV) loans with high interest rates or low ticket size are more prone to defaults, according to an India Ratings report.

“At a high loan internal rate of return (IRR) of above 25 per cent, the average delinquency rates for new and used CV loans can be at least 60 per cent higher than the average rates seen across the portfolio,” the report said.

“However, originators tend to limit loan-to-value (LTV) ratios at high interest rates. This helps in reducing losses in the event of default,” said Arvind Rana, Analyst with India Ratings’ Structured Finance Group.

“This indicates that charging high interest rates is not a mitigating factor sufficient to address the risk associated with loss severity in CV loans,” Rana said.

Also, small loans for vehicles valued below Rs 2.5 lakh show a high 90-plus days past due (dpd) delinquency rate of 3.1 per cent for both new and used CV loan pools. The high delinquency rates at lower vehicle values indicate the weak credit profile of borrowers seeking finance of small ticket commercial vehicles, the report said.

In contrast, new and used CV loan pools with vehicle value above Rs 7.5 lakh show average 90-plus dpd delinquency rates of 1.8 per cent and 0.6 per cent, respectively.

The agency further said that the originating standards remain broadly similar across some southern States such as Andhra Pradesh and Tamil Nadu that show lower delinquency rates than the portfolio average due to stronger presence of originators and strong repayment track-record of underlying borrowers.

On the other hand, Maharashtra, Madhya Pradesh and Uttar Pradesh show higher-than-portfolio average delinquency rates.

(This article was published on December 14, 2012)
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