Slowing Growth Is Credit Negative For Indian Auto ABS

New Delhi, September 5: India's slowing economic growth is credit negative for Indian auto asset-backed securities (ABS) backed by commercial vehicle loans, because the performance of such loans is highly correlated to economic conditions, Moody's Investors Service said in a new report on Thursday.

Most Indian auto ABS are backed by commercial vehicle loans, and past episodes of slowing economic growth – such as during the 2012-14 financial years – have increased auto ABS loss rates.

“Soft consumption and weak services activity in India will constrain demand for freight transport by commercial vehicle operators, in turn reducing operators' revenue and weakening their ability to repay loans,” said Dipanshu Rustagi, Assistant Vice President and Analyst at Moody's.

“Although auto ABS delinquencies have not increased significantly so far during the current slowdown, the performance of commercial vehicle loans backing ABS deals could deteriorate significantly if economic conditions remain subdued for a prolonged period,” added Rustagi.

On August 30, GDP data for the three months to June 2019 showed that India's economy grew by just 5 per cent from the same period a year earlier, its slowest quarterly growth rate in six years.

Freight rates earned by Indian commercial vehicle operators have declined since early 2019 as demand for goods transport has weakened. In addition to weak demand, there is surplus capacity in the medium and heavy commercial vehicle segments because changes to axle-load norms in July 2018 allow vehicles to carry more freight, which has also weighed on freight rates.

Moody’s pointed out loans on new medium-heavy commercial vehicles (MHCV) pose the greatest risk during an economic downturn because of the higher purchase price for these vehicles. Although loan repayments on new vehicles are substantially higher than those on used vehicles, operating costs for used vehicles are only marginally higher than for newer vehicles.

During India's 2012-14 downturn, loss rates on new MHCV loans increased by more than loss rates for used MHCV and new and used light commercial vehicles.