Stress on CV Loans to Continue on Delayed Industrial Recovery - India Ratings

Mumbai, January 28, 2014: India Ratings & Research (Ind-Ra) has maintained a Stable Outlook on its structured finance ratings. This is because most of the agency’s rated structured finance transactions have an ‘IND AAA(SO)’ rating which takes into account extreme risk scenarios. The agency maintains a stable outlook for asset performance of all asset classes except commercial vehicle (CV) and construction equipment (CE) loans which have been impacted by a continued slowdown in industrial activities.

Ind-Ra maintains a Stable Outlook on CV loan asset backed securities (ABS). Barring some recent vintage transactions which have seen a sharp rise in delinquency, most Ind-Ra rated CV loan ABS are expected to continue exhibiting stable performance. However, the agency has revised the asset performance outlook on CV loans to Negative from Stable to Negative. The delays in industrial recovery and subdued private consumption expenditure will continue to put pressure on the freight demand of medium and heavy commercial vehicle and light commercial vehicle, respectively, for at least 1HFY15. The already narrow operating margins of CV operators can further weaken if diesel price continues to rise.

The agency maintains a Stable Outlook both on asset performance and ABS transactions backed by tractor loans. This is because underlying farm borrowers continue to be aided by a stable rise in minimum support prices, favourable rainfall and rural development initiatives which have resulted in delinquencies remaining well within the agency’s expectations. Ind-Ra believes the rural economy continues to be relatively less affected by the slowdown in the Indian economy.

Ind-Ra maintains a Stable Outlook both on asset performance of mortgages and residential mortgage-backed securitisation (RMBS) transactions. Mortgage loans continued to show robust performance in 2013 amid high interest rates and persistent inflation in a slowing economy. The stable performance is the outcome of quality credit underwriting and pro-active servicing deployed by mortgage originators. Also, the high levels of prepayment and rising property prices over the last few years have made current loan-to-value ratios lower than 60% across most cities. Hence, any moderate price correction is not likely to have a rating impact.

Ind-Ra maintains a Stable to Negative Outlook for CE loans and a Stable Outlook on ABS transactions backed by CE loans. CE loan performance has seen some deterioration resulting from a sustained contraction of the mining industry and slow growth rate in other key infrastructure sectors. Mining and infrastructure are the key sectors that drive capacity utilisation of construction equipment. While Cabinet Committee on Investments’ continued efforts to clear the logjams in infrastructure projects could push infrastructure growth, mining growth rate is less likely to recover significantly in the next two quarters.

Economic growth at levels lower than Ind-Ra’s expectation (5.6% in FY15) could impact the outlook of all the asset classes. The Outlook of CV loan ABS could be revised to Stable to Negative from Stable in case of a sustained decline in growth in industrial production leading to lack of freight demand for CV loan borrowers. Conversely, a robust upward trend in manufacturing and industrial production leading to lower CV loans delinquencies would result in their outlook being revised to Stable from Negative.

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