Issuance of securities backed by commercial vehicle loans to remain high this fiscal: Moody’s

Indian asset-backed securities (ABS) supported by loans on sale of commercial vehicles (CVs) and commercial equipment (CE) will continue to grow this fiscal, extending the strong growth rates recorded in the fiscal ended March 31, 2016, Moody’s Investors Service said.

CVs and CEs are the main ABS asset classes in India.

“CV and CE sales and loans to finance those sales will drive auto ABS issuance by loan originators at a time when financing conditions for borrowers are becoming more favourable and defaults on CV loans are low,” says Vincent Tordo, analyst at Moody’s.

Economic growth and easing financing conditions in India will support rising CV sales, while default rates will remain low and amortisation rates will remain high in 2016-17, in turn supporting demand for auto ABS, Tordo added.

Moody’s conclusions were contained in a recently-released report on Indian auto ABS: ‘Greater Commercial Vehicle Sales and ABS Issuance in Financial Year 2017 Reflect Positive Credit Conditions’.

In 2015-16, the issuance of ABS backed by CV and CE loans increased 60 per cent to ₹12,000 crore, from ₹7,500 crore in the previous year, accounting for around half of all Indian ABS issuances.

Loans backed by tractor, car and utility vehicle loans were also key segments, accounting for 12 per cent of ABS volumes.

Moody’s sees India’s GDP growing by around 7.5 per cent in both 2016 and 2017, which will help underpin demand for CVs. In particular, Moody’s expects a pick-up in the sales of light CVs and steady growth in the sales of medium and heavy CVs.

In addition to economic activity, as indicated, gradually easing financing conditions will support CV sales in 2016-17 on the back of lower official interest rates and measures taken by the Reserve Bank of India to improve the transmission of monetary policy to lending rates.

Defaults to remain low Moody’s further expects default rates on Indian CV loans to remain low and amortisation rates to remain high in FY17, which will support demand for auto ABS.

Although Moody’s rated Indian CV loans and ABS exhibit a relatively high level of pre-90-day delinquencies, these delinquencies are temporary and the proportion of loans that are still delinquent after 90 days, and particularly after 180 days, drops away significantly.

Also, amortisation rates are high, which leads to a build-up of available credit enhancement to support the rated ABS. Demand for ABS backed by CV and CE loans is also underpinned by India’s priority sector lending (PSL) targets for banks, in addition to the long and relatively stable track record of CV/CE lending in the country and the relatively large size of CV/CE loan portfolios.

Indian banks have to meet targets for lending to areas deemed a priority by the RBI.

Banks that cannot meet PSL targets with their own lending can do so by investing in securitisations where the underlying assets are from a priority sector. The CV/CE loans securitised in 2015-16 were primarily those that qualified as priority sector loans.

In 2016-17, PSL targets will continue to be a key driver of ABS issuance, while an uptick in CV sales will also spur issuance. “We also expect that recent regulatory changes will encourage the issuance of pass through certificates (PTCs) issued by securitisation trusts,” Moody’s said.

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