Money & Banking

Lockdown to hit performance of commercial vehicle and SME loans in Indian asset-backed securities: Moody’s

Our Bureau Mumbai | Updated on March 30, 2020

The lockdown will severely constrain operators’ ability to earn income and repay commercial vehicle loans   -  Photobuay

The economic disruption caused by the 21-day lockdown will hit the performance of commercial vehicle and small and medium enterprise (SME) loans in Indian asset-backed securities (ABS), according to Moody’s Investors Service.

ABS are securities such as bonds and notes, which have pools of loans as underlying collateral, sold to investors. Most assets in Indian ABS that Moody’s rates are commercial vehicle and SME loans.

The agency assessed that for commercial vehicle operators, the lockdown will shut off the transport of non-essential freight. This will severely constrain operators’ ability to earn income and repay commercial vehicle loans.

Moreover, slowing economic growth will dampen demand for freight transport beyond the period of the lockdown.

Delinquencies to rise

“Freight rates are declining. We therefore, expect loan delinquencies to increase for at least the next few months in commercial vehicle loan auto ABS deals.

“Similarly, the lockdown will bring many SME businesses to a halt, while slowing economic growth will constrain earnings and profitability through 2020,” said Dipanshu Rustagi, AVP-Analyst, and Jerome Cheng, Associate Managing Director, in a note.

This will cause some SME borrowers to miss loan payments, pushing up delinquency rates in SME ABS for at least the next few months, they added.

In addition to hurting commercial vehicle operators’ financial capacity to repay loans, Moody’s said the lockdown will disrupt physical loan collections.

For 40-60 per cent of loans in Indian auto ABS, borrowers make loan payments to collection agents in person. The lockdown will disrupt such loan collections, and the overall collections for the pools could drop significantly, the agency said.

ABS transactions will use loan collections for March and April – the period of the lockdown – to fund payments to investors in April and May respectively.

Moody’s observed that if there is a shortfall between loan collection and investor payout amounts, ABS deals would draw on cash collateral and excess interest spread to meet the monthly investor payouts.

“Most Indian ABS transactions pay both interest and principal to investors on a predetermined periodic basis. Hence, transactions face greater liquidity risk.

“Assuming no collections for our rated Indian ABS, deals’ cash collateral can cover investor payouts over the next two to threemonths at the least, but this could be insufficient in the event of prolonged loan collection disruptions,” the agency said.

The global credit rating agency warned that severe loan collection disruptions, in addition to constraints on new funding, will adversely affect the liquidity profiles of originators or servicers.

If liquidity issues become large enough to hurt the viability of originators or servicers, this would pose an additional risk to loan collections and therefore, Indian ABS, it added.

The agency felt that the lockdown and the broader fallout from the virus’ spread in India and around the world will significantly suppress India’s economic activity.

Moody’s had earlier slashed its 2020 calendar year forecast of India’s GDP growth to 2.5 per cent from the previous estimate of 5.3 per cent. It expects 2021 GDP growth at 5.8 per cent.

Published on March 30, 2020

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