Further moderation in India’s economic growth may lead to increased defaults in asset-backed security (ABS) transactions, as the performance of assets is likely to deteriorate in 2012 and 2013, according to Fitch Ratings
Fitch has changed the performance outlook across various asset classes from stable to negative, especially for commercial vehicle (CV) and commercial equipment (CE) loans due to high interest rate scenario along with regulatory issues in the mining sector.
Asset-based transactions provide security to the investors and lenders in case of defaults. However, with deteriorating asset performance, the ability to meet re-payment obligations to the investors may go down.
“A more severe moderation of real GDP to below six per cent could have a significant impact across asset classes and result in outlooks turning negative,” said Fitch in its report released on Wednesday. While this may lead to increased delinquencies in ABS transactions, these levels will continue to be at or below base case expectations and, along with credit enhancement build-up (CEBU), transactions will perform as expected, it added.
The country's economic growth rate slipped to 6.9 per cent in the second quarter this financial, the lowest in nine quarters, prompting the government to lower its full-year growth projection to 7.3 per cent. The Reserve Bank of India has also lowered its growth target for 2011-12 to 7.6 per cent from the eight per cent projected earlier.
Credit enhancement build-up acts as a cushion in case the value of assets underlying the security is eroded and prevents defaults in ABS transactions. Thus, while several asset classes are under pressure, a healthy CEBU will offset the negative impact on ABS transactions. "It is improbable that delinquencies would reach levels where they could impact transaction ratings," the credit rating agency said.
Although, the asset performance of the CV and CE loans has been downgraded, the outlook given by Fitch for the tractor and mortgage loans is stable. "Fitch expects the tractor loan asset class to benefit from the government’s support for the rural economy, alternate uses for tractors (especially transportation) and above average rainfall in 2011," said Fitch. Mortgages are expected to continue to benefit from high borrower equity, low –to-income ratios (IIR), wage revisions in line with loan rate hikes, and flexible repayment options, it added.