We have revised the outlook on commercial vehicle (CV) loans to stable-to-negative for FY16 from negative while maintaining a stable outlook on residential mortgage loans and tractors loans. We have maintained a stable-to-negative outlook on construction equipment loans for FY16.
An improvement in the macro environment with lower inflation, interest rate and fuel price leading to higher disposable income will enhance asset quality. The first signs of improvement (or lack of deterioration) in the CV sector have emerged with the delinquency for 2014 vintage being on a lower gradient than the 2013 vintage and constant default rates in 2014 being half of that seen in 2013 vintage loans.
Ind-Ra's analysis suggests that the drop of INR4.4 per litre in diesel prices over the past 12 months will improve CV operators' margins by over 15% in FY16. Additionally, over FY16, the agency also expects the freight rates to remain stable and a faster absorption of excess CV capacity on the back of an improved industrial growth rate (6.5% in FY16).
Lower interest rates will benefit borrowers across asset classes. The agency's analysis suggests that every 50bp drop in mortgage lending rates will reduce the repayment burden by 3%-5%. The agency also expects lowering of interest rates to help in refinancing of existing fixed rate CV loans.
Economic growth at levels lower than Ind-Ra's expectation could impact the outlook of all the asset classes negatively. This, along with lower-than-expected industrial growth rate, a surge in CV sales and a sharp rise in fuel prices, could lead to revision in CV asset class outlook to negative. Any unexpected improvement in CV demand leading to lower CV delinquencies will result in the outlook being revised to stable.
High unemployment rate leading to a sharp rise in mortgage loan delinquencies could result in mortgage loan asset class outlook being revised to negative.
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