Small and medium enterprises (SMEs) will continue to be under stress as the impact of the new goods and services tax (GST) and demonetisation lingers on in 2018, however asset backed securities (ABS) of commercial vehicle loans will remain stable on the back of healthy domestic growth, rating agency Moody’s and its Indian affiliate ICRABSE -0.25 % said in a report on Monday.
“Delinquency rates in ABS deals backed by loans against property to SMEs will increase in 2018, because of the tougher operating environment for SMEs. The introduction of a GST in July 2017 and the government’s demonetization policy have placed stress on the SME sector,” said Dipanshu Rustagi, assistant vice president at Moody’s.
However, ABS backed by commercial vehicle loans issued in 2018 will have positive credit characteristics which together with healthy economic growth will support the performance of these deals.
Auto ABS backed by commercial vehicle loans account for around 45% of the total volume of outstanding ABS in India, and Moody’s expects that such deals will continue to account for a significant proportion of issuance in 2018.
Lenders will also be more cautious about new ABS backed by loans against property to SMEs. Due to the rising delinquencies and subdued operating environment for SMEs. The credit quality of new Indian ABS backed by loans against property to SMEs will benefit from the more stringent underwriting standards applied by lenders over the past year Moody’s said.
Housing loans will continue to be the best performing retail loan asset class in India due to its low and stable delinquencies over the years and supported by the nature of their underlying collateral (largely self-occupied residential property), the absence so far of any steep correction in property prices, and moderate loan to value ratios (LTVs), ICRA said.
India’s microfinance sector is also on the road to resurgence after suffering a setback due to the November 2016 demonetization as collection levels have recovered to around 94% in September 2017, though still lower than the high levels of 99%-100% prior to demonetization.
“There is a visible improvement in asset quality across all locations, except the Vidarbha region in Maharashtra and some districts in Madhya Pradesh. Several micro-finance institutions have reported over 98% collection ratios for the loans originated in calendar 2017. Consequently, the fresh slippage of loans into softer delinquency buckets has been arrested and non-performing asset levels seem to have peaked,” says Vibhor Mittal, head structured finance at ICRA.