Announcement: Moody's and ICRA: Outlook stable for Indian commercial vehicle and mortgage loan-backed securitization, despite demonetization

Moody's Investors Service and its Indian affiliate, ICRA Limited, say that the performance of Indian commercial vehicle (CV) loans backing asset-backed securities (ABS) will stay stable in 2017. Similarly, the performance of Indian home loans backing residential mortgage-backed securities (RMBS) will be stable over the same period.

"Delinquency rates for CV loans backing ABS transactions should increase in the short term, owing to the country's demonetization," says Dipanshu Rustagi, a Moody's Analyst. "Nevertheless, CV loan delinquencies should fall back to around 2016 levels over the course of 2017, owing to India's robust economic growth and low oil prices."

Moody's expects oil prices to remain low in 2017. Moody's forecast is for Brent crude oil prices of $45 a barrel in 2017, with a price band of $40-$60. Low oil prices are positive for the performance of CV loans, because fuel accounts for 40%-50% of the costs of commercial vehicle operators.

Moody's explains that in November 2016, CV operators benefitted from various support measures announced by the government, such as the acceptance of old currency notes at petrol pumps and waiver of toll charges; thereby relieving some liquidity pressure. However, the impact on the performance of these operators in the next few months — in the absence of these short-term allowances — remains to be seen.

While November collection performance reports showed stable performance, December and January reports will provide more relevant information. Moody's points out that November collection reports reflected performance mostly driven by October economic conditions.

Looking ahead, Moody's says that CV loan portfolios backing new Indian auto ABS issued in 2017 will — like portfolios backing existing transactions — show good credit characteristics, such as geographic and borrower diversification, fully amortizing repayment terms, low loan-to-value ratios of around 65%-70% for used vehicle loans and 80%-85% for new vehicle loans, and the presence of significant excess interest spread. These characteristics will support the performance of Indian auto ABS.

"On the home loans, arrears for mortgages backing Indian RMBS should remain low throughout 2017, supported by lower interest rates, and the fact that most of the homes were purchased by owner-occupiers," says Vibhor Mittal, an ICRA Vice President.

Home loans in India have adequate collateral cover, with initial loan-to-value ratios of around 60%-80%. Moreover, in most cases, the underlying property is occupied by the borrower, a credit positive. The eventual loss to the lenders — post liquidation of the collateral — should therefore stay low.

In addition, ICRA explains that factors like favorable demographics — in particular, a young working population and the rapid nuclearization of families — strong latent housing demand, and the government's accommodative policy will continue to provide impetus to the housing sector.

ICRA points out that entities operating in the affordable housing segment — catering to borrowers with marginal repayment capacity and showing a greater reliance on cash collections — could witness an uptick in early delinquencies. On the other hand, the prime housing loan segment — dominated by salaried borrowers — have not been impacted much by demonetization.

In November 2016, collections for ICRA-rated housing loan pools stayed strong, with an average collection efficiency rate of more than 98%. Similarly, collections in CV loan pools remained resilient, with a collection efficiency rate of 94% in November 2016 as compared to 93% in October 2016.