Fitch Ratings has revised its sector outlook on Indian auto loan asset-based securities (ABS) to deteriorating from neutral, driven by the expectation of a slower domestic gross domestic product (GDP) growth amid a global economic slowdown, elevated inflation and tighter monetary policy.
Fitch forecasts India's GDP to expand by 7.0% in the financial year ending March 2023 (FY22-23), slowing to 6.2% in FY23-24 as the worldwide slowdown weighs on the economy. Nevertheless, India's economic growth remains strong relative to that of global peers. India is expected to record one of the fastest growth rates among emerging markets in Fitch20 coverage this year as the economy is shielded, to some extent, by its domestically-focused nature.
"Tailwinds such as continued recovery in economic activity after the pandemic shock and the government's planned increase in infrastructure spending will help sustain fleet utilisation rates and contain the deterioration in asset performance in auto loan ABS transactions," the rating agency says.
According to Fitch, economic conditions remain challenging for the underlying assets in its portfolio, which are mainly commercial-vehicle loans extended to small road transport operators, who tend to be more vulnerable to economic shocks.
It says, "Higher interest rates increase the cost of funds, which tends to lower capital expenditure. Tighter financial market conditions are weighing on demand for capital goods, a leading indicator for investment. The worldwide economic slowdown is also likely to reduce demand for Indian exports. A slowdown in industrial activities could weigh on the performance of medium and heavy commercial vehicles, which are used mostly for long-haul transportation."
"The performance of light commercial vehicles tends to be more resilient as they typically serve non-discretionary demand. High inflation may increase the operating costs of vehicles and the cost of living, which may hurt operators' debt servicing capacity," it added.
The weighted-average delinquency rate of Fitch-rated Indian ABS transactions increased slightly in May 2022 and remains elevated. Some of these delinquent loans ended up in higher buckets and pulled up the proportion of loans 90 plus days past due (dpd) as well, with the 90 plus dpd bucket rising to 2.6% in October from 1.7% in August.
Fitch says it expects delinquencies to remain slightly higher than in first quarter (1Q) of 2023, but further risk of deterioration is contained by the strong economic growth. "The risk is on the downside if India's economic slowdown accelerates beyond our forecast or if there is an unexpected resurgence in fuel prices."
The rating outlook on Fitch rated Indian ABS transactions as stable. "The transactions benefit from a simple sequential structure where the credit enhancement typically increases rapidly during the transaction life. The underlying assets also tend to perform much better than the overall books of the originators due to the stricter pool selection criteria. We expect these features to provide additional buffers against a deterioration in asset performance," the rating agency says.