Indian Auto Loan ABS Outlook Revised to Neutral; Covid-19 Risk Remains

Fitch Ratings-Hong Kong: Fitch Ratings has revised our sector outlook on Indian auto loan ABS to neutral from deteriorating, driven by stable asset performance that is supported by the economic recovery. The risk from new waves of Covid-19 infections remains due to India’s lower vaccination rate compared with other major economies. However, Fitch expects any stress to be temporary and less severe than in 2020-2021.

Fitch forecasts Indian GDP to grow by 8.4% in the financial year ending March 2022 (FY22), followed by 10.3% growth in FY23, recovering from a contraction of 7.3% in FY21. The economy has rebounded quickly from the second wave, with some economic indicators, including mobility indices, recovering to close to pre-pandemic levels. The operating environment for the commercial-vehicle (CV) sector, which comprises a major part of our rated portfolio, has also improved in line with economic activity. The second shock proved to be a short-lived disruption and has not derailed the overall recovery of the CV sector from the pandemic’s lowest point. Fitch expects the economic recovery in 2022 to remain supportive of the sector.

Fitch expects delinquencies to remain slightly elevated compared with pre-pandemic levels, with the risk of higher volatility from a renewed surge in cases. The average 90+ days past due arrears in our rated transactions’ portfolios, excluding the newer transactions originated in 2020 and 2021, peaked at 1.9% in the June 2021 collection month before declining to 1.0% in September 2021. However, we believe better asset performance during the second wave, despite significantly higher numbers of new infections than the initial wave, may indicate that a resurgence of cases will translate into only temporary and moderate asset performance deterioration, as vaccination progress reduces the risk of national lockdowns and the sector adapts gradually to the post-pandemic environment. Nevertheless, the recent emergence of the Omicron variant adds uncertainty to the economic recovery and a more severe economic disruption than we expected from new waves could return our sector outlook to deteriorating.

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The rating Outlook on all of our currently rated Indian ABS is 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.