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25 March, 2019 13:37 IST
Growing stress in used CV & LAP loans; continued progress in tractor loans in 4QFY18: Ind-Ra
Source: IRIS | 15 May, 2018, 03.10PM
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India Ratings and Research (Ind-Ra) rates over Rs 150 billion of commercial vehicle (CV) securitisations, wherein delinquency indices have remained stable. Although the performance of new vehicles loans has been improving, there is growing stress in the used vehicle segment. Also, the recently originated collateral-backed loans to micro, small and medium enterprises (loan against property (LAP)) loans have continued to surge on all delinquency indices in the aftermath of a drop in property prices and Goods & Services Tax (GST) implementation. Meanwhile, tractor and microfinance institution (MFI) loans have continued on their path to recovery post demonetisation.

CV Loans: Ind-Ra's early delinquency index (EDI) for CV loans measured by weighted average (WA) 30+ days past due (dpd), rose to 7.89% in February 2018 from 6.87% in February 2017. This was mainly due to demonetisation, GST implementation, migration to BS-IV standard of vehicles and tightening norms of overloading of vehicles. These factors have affected used CV loan borrowers more than new CV loans, owing to their weaker credit profile. Ind-Ra believes the rising fuel prices with no commensurate rise in freight rates will shrink the operating margins of CV loan operators by 7%-10%, worsening the situation for used CV loan borrowers.

The performance of CV loans in Rajasthan, which contributes the highest share in the transactions rated by Ind-Ra, is better than the median 90+dpd delinquency of 2.47% across states. However, other key geographies such as Gujarat, Uttar Pradesh and Karnataka, which together contribute about 22% of the portfolio rated by Ind-Ra, have performed below par.

LAP Loans: Falling property prices and GST implementation continue to be a drag on the performance of LAP loans. WA 30+dpd delinquency rose 160bp yoy to 4.07% in February 2018, indicating that institutions are yet to align their strategy in respect of this segment.  Around 30% of Ind-Ra rated LAP portfolio is concentrated in NCR region which has high levels of unsold inventories as well as a lower market value of the property against the loan provided. This is likely to result in sluggish recoveries from non-performing assets. The WA 90+dpd delinquency of NCR region is 2.36%, 130bp higher than the median 90+dpd delinquency observed LAP loan portfolio across all states.

Tractor Loans: The performance improvement in tractor loans is evident with WA 90+dpd delinquency dropping to 3.25% in February 2018 from 4.70% in February 2017. The recent vintage of 2017 continued their robust performance, indicating an improvement in asset quality. However, Ind-Ra expects the recovery to be slow through 2018, due to a subdued agricultural yield coupled with minimum rural agricultural wage growth amid uncertainties regarding region-wise rainfall distribution. The 90+dpd delinquency levels observed for Madhya Pradesh, Uttar Pradesh and Gujarat, which together contribute about 33% to the total tractor loan portfolio rated by Ind-Ra, have been higher than the median 90+ dpd delinquency of about 3.9%.

MFI Loans: Indicating a steady recovery from demonetisation, WA 0+dpd in MFI loans continued to improve to 4.03% in February 2018 from 11.07% in February 2017. This is on account efforts made by the issuers to improve collections and normalisation of cash circulation.

Construction Equipment Loans: The boost to infrastructure spending, leading to better asset utilisation, continued to support the performance of construction equipment loans. The 2016 and 2017 vintages continue to outperform with peak 90+ dpd delinquencies of only 0.68% and 0.46% compared to a peak of more than 3% observed in earlier vintages.

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