Rise in Indian auto loan arrears to lag economic slowdown: Fitch


HONG KONG: The net cumulative 90-plus days past due arrears of Indian auto loan securitisations are expected to rise by 1.25 to 1.50 times from pre-pandemic levels in 2021 due to the lagged effect of macroeconomic stress, Fitch Ratings has said.
The rise in arrears on the books of originators is likely to be more severe than that in securitised pools.

Fitch forecasts Indian GDP to contract by 9.4 per cent in the financial year ending March 2021 (FY21) before expanding by 11 per cent in FY22 from a low base.

“We expect the operating environment for the commercial vehicle sector, which comprises a major part of our rated portfolio, to improve from the lows experienced during the pandemic-related lockdown with the gradual resumption of economic activity,” it said.

However, the segment will remain under stress compared with pre-pandemic levels until at least 1H 21.

“We have a negative sector outlook on auto loans. Borrowers have benefited from an option to delay payments for six months with the payment holidays ending August 31,” said Fitch.

There have been improved collection rates since April across all rated transactions, although some borrowers may have built up liquidity during the payment holiday and used this liquidity to make their September and October repayments.

“We expect such borrowers to experience difficulty in making repayments over the next few months due to the stressed macroeconomic environment, lifting arrears in 1H 21 with a lag effect.”

Delinquencies are likely to stay elevated through to 2H 21. Arrear positions were frozen at February-end and only resumed ageing once the payment holidays ended.

“At the September collection month, 90-plus days past due arrears for our rated portfolio averaged 1.4 per cent of the closing pool principal, similar to the 2019 level of 1.3 per cent,” it said.

However, the current arrear position does not truly reflect the credit quality of underlying portfolios due to the payment holidays and freeze on arrear positions.
Fitch added that a slower economic recovery than expected or increased economic stress that results in arrears rising above its forecast could take our sector outlook deeper into the negative territory.

“A fast economic turnaround could moderate sector stress, but we are unlikely to revert to a stable sector outlook unless the macroeconomic recovery is very strong and rapid.”