At the same time, auto ABS delinquencies increased in February 2017 after a slight improvement in December 2016 and stabilization in January 2017, but will decline back to pre-demonetization levels by June if economic activity continues to pick up and oil prices remain in a range between $40 and $60 a barrel.
"Delinquencies had increased in the wake of demonetization because the decline in economic activity triggered by the policy resulted in a loss of income for some commercial vehicle operators, causing them to miss auto loan repayments," says Vincent Tordo, a Moody's Analyst.
At end-February, over 30 days in arrears was at 12.7%, compared with 10.9% in December 2016.
"However, measures of economic activity in India -- such as manufacturing, services and industrial production activity -- now appear to have bottomed post the government's action in November last year," adds Tordo.
Another reason for the rise in delinquencies in February was the increase in prepayment rates, which reduced outstanding balances in auto loans at a faster rate than the average rate.
This development contributed to the increase in delinquency rates, because arrears levels were higher relative to the smaller outstanding balances.
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In India, commercial vehicle loan originators often attempt to persuade borrowers to sell their vehicles and repay their loans if the vehicles are not being used intensively.
Such a development may have occurred in the aftermath of demonetization, thereby pushing up the prepayment rate. Given the circumstances that drive prepayments in India, prepayment rates can be volatile and do not necessarily reflect improving performance.
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