RPT-Fitch: Indian SF Ratings Resilient to Rising Delinquencies
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Oct 16 (Reuters) - (The following statement was released by the rating agency)
Delinquency rates in Indian structured finance transactions will continue rising in the next 12-18 months due to the fall in the country's economic growth rate and rising fuel prices weakening debt-servicing ability, Fitch Ratings says. But collateral performance remains within our base-case assumptions, and loss-absorption mechanisms and credit enhancement build-up in Indian SF transactions will continue to support the stable rating performance and outlook of the asset class.
Lenders' effective collection strategies, with regular and frequent borrower contact and strong local knowledge relating to a borrower's circumstances, have helped keep delinquency rates in Indian SF transactions low. But a rising trend is evident in Fitch-rated transactions, reflecting the slowdown in the Indian economy in the last two to three years.
For transactions closed in the financial year to March 2013, the average 90+ days delinquency rate was 2.0% within seven months of closing (the equivalent figure for FY12 transactions was 1.7%). Transactions closed in FY12 have been more resilient due to higher seasoning, but the trend to higher delinquencies is also evident. In September 2013, 90+ days delinquencies for these transactions had almost doubled, rising to 2.5% from 1.3% a year earlier.
Nevertheless, the 90+ day delinquency rates have been within our base-case assumptions made when we assigned ratings (90+ dpd assumptions at transaction closing average 4.5%), while 180+ day delinquency rates remain low. At end-September 2013, the 180+ dpd delinquency rate was only 0.54% for the FY12 vintage and 0.17% for FY13. This suggests an over 80% cure rate for the 90+ dpd, reflecting originators' successful collection strategies, the cultural and social stigma regarding unpaid loans, and the desire of borrowers with restricted access to alternative sources of credit to avoid default. We therefore expect 180+ day delinquencies to rise, but remain modest.
The good monsoons this year will also help keep a lid on delinquency rates, as 48% of the Fitch-rated portfolio consists of light or small commercial vehicle loans related mainly to agriculture or the transport of essential goods and services.
Loss-absorption through excess spread (averaging 12.3% and 6.9%, respectively, for the FY12 and FY13 transactions at closing) and the pass-through payment structures of the transactions will continue to support the stable rating performance despite the rise in delinquencies.
Amortisation has resulted in credit enhancement build-up. CE for transactions closed in FY12 averaged 38.6% at end-September 2013, or 3.5x the closing level. CE for transactions closed in FY13 averaged 16.5% at the same date, 1.4x the closing level. Only two of the 22 Fitch-rated Indian SF transactions have drawn on their CE facility. In each case, this has only happened once, and for less than 2% of the CE facility amount. The CE facilities were subsequently topped up by excess spread to their original amounts.