Downslide in CV Loan Performance Continues; New Trend Emerges - India Ratings

Mumbai, December 6, 2013: India Ratings & Research (Ind-Ra) says the performance of commercial vehicle (CV) loans touched new lows in 3Q13 due to the prevailing slowdown in the economy.

The weighted average (WA) 90+ days past due (dpd) delinquencies of CV loans rose to 3% in 3Q13 from 2.4% in 2Q13. The agency does not expect any reprieve in the next two quarters as its forward looking indicator Early Delinquency Index (EDI) rose to 8.2% in 3Q13 from 6.5% in 2Q13, suggesting the deterioration in asset quality has not yet bottomed out. This is in line with Ind-Ra’s stable to negative outlook for CV loans for 2013. However, transactions continue to have a stable outlook due to the availability of excess interest spread, sufficient credit enhancement (CE) levels and fully amortising nature of underlying loans.

Ind-Ra observed 2013 vintage CV loans defaulted faster than other vintages. For 2013 vintage pools, WA 90+dpd delinquencies reached 3.2% in 3Q13 from 1.45% in 2Q13 within eight months of average seasoning since issuance (WA 90+dpd delinquencies were 2.6% and 1.9% at similar seasoning for 2012 and 2011 vintage). For 2009 and earlier vintages, such delinquency levels were observed over two to three years since transaction closing. The quantum of uptick in 90+dpd delinquencies for 2013 vintage by over 100% in a single quarter indicates that while older vintages have stabilised, recent vintages would remain an area of concern.

Ind-Ra’s portfolio of CV loan asset backed securitisation (ABS) transactions indicates the reversal of certain established trends. In recent times, the performance of loans at loan-to-values (LTVs) over 80% and new CV loans (which have historically performed better) has deteriorated compared with lower LTV and used CV loans, respectively. This indicates that even creditworthy borrowers may not remain insulated in times of economic slowdown.  

Construction equipment loans also showed signs of stress in 3Q13 recording a new peak WA 90+dpd delinquency of 3.4% in 3Q13 (2Q13: 1.5%).  Most of the deterioration was contributed by 2012 vintage loans, wherein WA 90+dpd delinquencies reached 3.3% in Q313 from 1.8% in Q213. However, the increase in delinquencies has not resulted in any negative rating actions, mainly due to substantial CE build-up. The recent positive sentiments reflected by a 3.3% yoy rise in the Mining Index may cushion the transactions from further rise in delinquencies.

In 3Q13, 180+dpd delinquencies in 2012 vintage tractor loans increased marginally to 2.5% (2Q13: 2.4%), showing some signs of stabilisation. Tractor loan EDI remained range bound (7%-7.7%), indicating an arrest of short-term delinquencies. Their performance is likely to improve on the back of the higher-than-average rainfall in 2013 and an improvement in Agri GDP (up 4.4% yoy) and an upward revision in minimum support prices.

The performance of Ind-Ra rated mortgage loans also remained stable during the quarter.  In 3Q13, WA 90+dpd delinquency remained flat at 0.4%. The agency’s Residential Mortgage Index also remained flat at 0.33, reflecting the strong performance of the agency’s rated mortgage transactions.

(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)