Moratorium, economic downturn raising risks for asset-backed securities

The high take-up of loan moratoriums and the economic downturn due to Covid-19 are increasing risks for asset-backed securities (ABS). According to Moody’s Investor Service, most ABS made structural changes between April and June to mitigate rising pandemic-related liquidity risks, though these only partially offset the growing credit challenges.
 

In the case of auto ABS rated by Moody’s, 70-100 per cent of the underlying loans (as percentage of the outstanding principal) are on  moratorium. This figure is 55-65 per cent in the case of micro, small and medium enterprises (MSMEs).

 

The moratorium has significantly reduced Indian