Moody's: Indian auto ABS defaults will remain low, despite high pre-90-day delinquencies

Moody's Investors Service says that defaults in Indian auto loan asset-backed securities (ABS) transactions will remain low despite the high proportion of loans that are less than 90 days delinquent.

To a large extent these early delinquencies prove temporary and the proportion of loans that are still delinquent after 90 days, and particularly after 180 days, drops away significantly, says Moody's.

"The primary reason for the higher level of pre-90-day delinquencies in Indian auto ABS is the types of underlying obligors and vehicles securing auto ABS transactions," says Vincent Tordo, a Moody's Analyst.

In India, auto ABS transactions are typically backed by loans extended to non-prime self-employer borrowers with often variable incomes to finance the purchase of commercial vehicles.

 

It is common for these obligors to fall behind on repayments for a few months due to their often low income and limited experience in dealing with financial institutions, and does not reflect an inability or unwillingness to make repayments over the longer term -- as reflected by the low rate of longer-standing delinquencies.

Conversely, auto ABS transactions in other Asia Pacific countries are generally backed by loans to prime borrowers with stable incomes to purchase passenger vehicles.

"We expect the default rates on loans in Indian auto ABS to remain low, despite the high level of pre-90-day delinquencies," says Tordo.

Moody's assessment is based on the historical performance observed for the loan portfolios of commercial vehicle financiers in India, Indian auto ABS transactions rated by ICRA and the low level of loan defaults so far in Moody's-rated transactions, as well as supportive economic conditions in India.

Moody's further notes that auto loan repayments in India are predominantly done in person, in cash, thereby closely linking the performance of Indian auto ABS transactions to the viability of the originator acting as servicer to collect loan payments.

Consequently, any durable and significant servicing failure would cause disruption to the collection of loan repayments, and therefore affect payments to auto ABS investors.

Moreover, the steep drop off in loan delinquencies in the 90+ bucket reflects a step-up of collection efforts by the services against those obligors.

Given the importance of originators to the performance of Indian auto ABS transactions, the rating of the ABS will generally have some linkage to the credit quality of the originator.

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