Moody's Investors Service today said the asset quality of retail loans backing Indian asset-backed securities (ABS) will improve over the next two years, despite an expected uptick in non-performing loans.
It expected the performance of loans backing commercial vehicles and construction equipment to improve owing to favourable operating conditions and increased efforts by originators to prevent delinquent loans from progressing into NPLs.
"Although retail loans originated by NBFCs account for the bulk of assets backing Indian ABS, we expect improving macroeconomic conditions and more rigorous collection processes by originators will boost their underlying performance," Moody's Analyst Vincent Tordo said.
The underlying performance and asset quality of retail loans backing Indian asset-backed securities (ABS) will improve over the next two years due to tightened recognition criteria, Moody's said.
The new NPL criteria require NBFCs to recognise loans that are 150 days or more in arrears as NPLs, compared to 180 days previously. The standard will further tighten to 120 days from March 2017 and 90 days from March 2018.
While Moody's expects NPL ratios reported by NBFCs to rise over the next two years as a result of the new criteria, it expects the improving underlying performance to be reflected in lower delinquencies rates.
Moody's report also highlights that Indian ABS are largely immune from the run-up in NPLs in the Indian banking sector, because Indian ABS are exclusively backed by loans originated by NBFCs and not by banks.
In addition, the vast majority of assets backing ABS are retail or small loans, while the increase in bank NPLs has been largely the result of poor performing corporate loans to borrowers in heavy industries.
Banks' retail loans have in fact seen their performance improve over the past five years.
Moody's further notes that the categorisation of delinquent loans as NPLs at an earlier stage will bring the Indian market more in line with global practices, thereby allowing a better comparison of the performance of Indian ABS with those in other markets.
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