Note Ban Negative For Auto Asset Backed Loan In Short Term: Moody’s

Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Demonetisation has negatively impacted the performance of Indian auto asset backed loans in the short term and the effect will last until March, Moody's Investors Service said today.

“The Indian government's decision to remove a high proportion of currency notes from circulation in November 2016 has proved negative for the performance of Indian auto asset backed securities (ABS) in the short term, leading to a 1.3-percent decline in collections for November and December 2016,” it said in a report.

Looking ahead, Moody's expects ABS delinquencies and collections to return during 2017 to levels prior to demonetisation, as the economic slowdown triggered by notes ban wanes, oil prices remain around current levels and positive policy initiatives in Budget take hold to support earnings of commercial vehicle (CV) operators. Moody's notes that demonetisation has disrupted the recovery observed in the CV loan segment for the past two years.

According to ICRA data, CV loan delinquencies fell to 6.3 percent in June 2016 compared with peak levels of about 9 percent at the end of 2014.

“In such an environment, we expect the performance of the 15 Indian auto ABS transactions that we rate to continue to be weaker than was the case prior to demonetisation until at least the end of March 2017, owing to the temporary drag on consumption and investment triggered by the policy announced on November 8, 2016,” Moody's Analyst Vincent Tordo said.

However, the deterioration in performance has been limited to early-stage delinquencies and supports Moody's expectations of a short-lived slippage in performance and proactive delinquency management by service providers, rather than as a precursor of permanent losses.

“Cash collateral and excess interest spread protect Indian auto ABS against the drop in collections, and we note that such securities have large levels of cash collateral and excess interest spread, leaving them well placed to withstand the impacts of demonetisation and the economic slowdown,” Tordo said.

The Budget announcement of income tax cuts as well as lower rates of micro, small and medium enterprises (MSMEs) will increase the disposable incomes of people with CV loans, which will be positive for the performance of auto ABS backed by such loans.