Coronavirus pandemic to keep repayment risks elevated for securtised loans

The repayment risks on securitised loans in India will remain elevated for the next 12 months despite the improvement in collection efficiency after the end of moratorium, according to rating agency Moody’s.  

Weak economic conditions will continue to hurt borrowers' ability to repay loans, keeping performance risks for asset-backed securities (ABS) elevated.

The moratorium on payments came to an end in August 2020. The collections in rated Indian ABS improved markedly in September and October, although they remain below pre-coronavirus levels, said Dipanshu Rustagi, assistant vice president and analyst at Moody's.

At the same time, delinquency rates for rated auto and micro, small and mid-size enterprise (MSME) loan ABS also increased with some borrowers unable to resume or sustain repayments amid the deep economic contraction.

"Given weak economic conditions, asset performance risks will remain elevated in this environment and we expect delinquencies in auto loan ABS and MSME loan ABS will continue to increase over the next 6 to 12 months," added Rustagi.

A new government support measure and existing transaction features will mitigate some of the risk. In November, the Indian government announced a Rs 2.7 trillion fiscal support package, which will benefit borrowers in the MSME sector.

Moody's-rated Indian ABS benefit from non-amortising cash reserves and excess spread, which provide liquidity and buffers against losses, it added.

Meanwhile in another report, Moody’s said the gradual tapering of coronavirus relief measures will help prevent a spike in non-performing loans (NPLs) for ASEAN and Indian banks. Both regions face an uneven recovery ahead.

The gradual tapering of support measures will give borrowers time to adjust and enable banks to build loan-loss buffers. This in turn will reduce the risk of a sharp decline in banks' asset quality, said Rebaca Tan, assistant vice president and analyst at Moody's.

Still, risks remain amid a likely uneven recovery in 2021 that remains vulnerable to setbacks, including any new wave of coronavirus infections.

Loan moratoria were the most common among programmes introduced at the outset of the pandemic to support borrowers. They will soon be phased out in most countries. In place of loan moratoria, regulators are encouraging banks to restructure loans by allowing lenders to classify these loans as performing.

This approach will buy many banks important time to manage the deterioration in asset quality. The dip in asset quality is likely to follow the economic downturn, which will drive up unemployment and depress corporate earnings, it added