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Securitisation market to remain unaffected by demonetisation: Moody’s

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Rating agency Moody’s Investors Service sees securitisation market to remain stable next year despite the demonetisation drive as it expects good credit quality across most asset classes.

“Robust growth and low oil prices will underpin stable auto ABS performance despite the economic disruption from the demonetisation drive,” Moody’s Senior Vice-president Yian Ning Loh said in a report, adding that ABS backed by CV loans account for 45 per cent of total volume outstanding.

It expects performance of commercial vehicle (CV) loans supporting auto asset-backed securities (ABS) transactions to remain stable next year even though it expects the delinquency rates to increase somewhat in the very short term owing to the demonetisation.

“But delinquencies should return to their current levels over the course of 2017 due to robust economic growth and low oil prices,” says the report.

Moody’s also expects new auto ABS issued in 2017 to have good credit characteristics apart from residential mortgages that should also remain strong in 2017, with low delinquencies reflecting low interest rates, steady house prices and stable prepayment rates.

Projecting a stable market, Moody’s said “robust growth and low oil prices will underpin stable auto ABS performance, despite disruption from demonetisation. Therefore, we view CV loans backing auto ABS transactions to be stable”.

It also expects residential mortgage to be strong as lower interest rates and steady house prices will help tide over the demonetisation impact.

“We expect the current strong performance to continue into 2017, with delinquencies remaining low, reflecting an environment of lower interest rates, steady house prices, and stable prepayment rates,” the report added.

Noting that the demonetisation has resulted in an acute shortage of cash-in-hand for commercial vehicle operators, it expects that ability of some to pay principal and interest on their CV loans will be impaired in the immediate next few weeks or even months. As a result, we expect an immediate increase in CV loan delinquencies”.

Therefore, return of normalcy depends on how soon the government and RBI can replace the notes, it added.

“Although it remains unclear exactly how long that would take, our expectation is CV loan delinquencies will decline back to around current levels over the course of 2017, supported by robust economic growth and low oil prices,” the agency predicted.

Pegging GDP growth at 7.5 per cent in 2016-17, it said such a robust growth will support performance of CV loans, as there will be more freight available for commercial vehicle operators to move at better rates, bolstering their income and capacity to make loan repayments.

Its optimism also stems from its assessment of oil prices staying low at USD 45 a barrel in 2017, with a price band of USD 40-60.

“Low oil prices are positive for the performance of CV loans because fuel accounts for 40-50 per cent of the cost of commercial vehicle operators,” the report noted.

The 90+ days past due delinquency rates for CV loans on new and used vehicles declined to 11.2 per cent and 6.7 per cent, respectively, as of March 2016, down from 16.3 per cent and 7.3 per cent as of March 2015.

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