INDIAN SF OUTLOOK STABLE; Asset Quality Concerns Remain

Mumbai, January 31, 2013: India Ratings has maintained a Stable Outlook for Indian structured finance transactions for 2013, despite a rise in delinquencies in a few asset classes on account of sluggish industrial growth. The Stable Outlook is driven by the agency’s expectations that the current delinquency trends will remain within India Ratings’ initial assumptions, leading to a build-up of credit enhancement (CE).
A majority of CV loan asset-backed securitisations (ABS) are likely to ride out the slowdown based on the agency’s initial default assumptions which anticipated the stress and have led to the build-up of CE for most transactions, particularly for vintages before 2012. “However, delinquencies are likely to remain high in CV loan ABS as CV operators continue to face slow road freight demand and compressed operating margins. Over the last year, freight rates on key long distance routes have remained largely stagnant, while key input costs such as diesel prices have risen by almost 16%, affecting the margins for truckers. This trend is unlikely to ease before mid-2013, given the lacklustre industrial production and deregulation of diesel prices”, says Purav Shah, Associate Director with India Ratings’ Structured Finance team.
Tractor loans have, however, been less affected by the slowdown in the industrial activity. Farm borrowers are supported by a higher rise in minimum support prices (MSP) than the increases in key farm input costs like diesel and fertiliser prices and lesser dependence on rainfall on account of non-farm usage of tractors. “In the nine months ended December 2012, food grain MSP increased on an average by 15% and non-food grain MSP on an average by 27%. This should allow farm borrowers to comfortably make debt repayments in 2013 and hence the stable outlook on tractor loan ABS”, adds Shah.
India Ratings maintains a Stable Outlook on mortgages and the transactions backed by them. Their performance is likely to be stable as interest rates have peaked and are likely to drop in 2013; thus borrowers should have improved repayment ability in 2013. Mortgage performance remained largely unaffected by the interest rate up cycle between 2009 and 2012 when rates increased on an average by 2.25%.
The recent regulatory changes on securitisation are also likely to act as filters in the current stressful economic situation. The minimum holding period (MHP) requirement, as per the revised Reserve Bank of India’s guidelines, would make only seasoned loans eligible for securitisations. Also, the interest rate cap on underlying loans for them to qualify under private sector lending would lead to lower interest rate loans being eligible for securitisations which have traditionally performed much better than the rest of the originators’ portfolio. These factors would lead to ‘cherry-picking’ of assets which could reflect in lower CEs.
The stable outlook for Indian structured finance may change if there is a severe moderation in India’s GDP growth to below 5% or in the event of a prolonged slowdown in the industrial activity which could affect freight demand.
A full report, ‘2013 Outlook: Indian Structured Finance’, is available at www.indiaratings.co.in.
(Source: Corporate Communications and Investors Relations.)