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Last Updated : Dec 12, 2012 06:48 PM IST | Source: Moneycontrol.com

CV loans at high interest rate may default: India Ratings

India Ratings has come out with its special report on "CV loans at high interest rate or of low ticket size more prone to default". According to the rating agency, deploying higher interest rates is not a mitigating factor sufficient to address the risk associated with loss severity in CV loans.


India Ratings has come out with its special report on "CV loans at high interest rate or of low ticket size more prone to default". According to the rating agency, deploying higher interest rates is not a mitigating factor sufficient to address the risk associated with loss severity in CV loans.


India Ratings’ ABS portfolio of CV loans
indicates that the delinquency rate for commercial vehicle (CV) loans increases with an increase in interest rates. It has been observed that 90+ days past due (dpd) delinquency rates shoot up to 3.6% and 2.7% for new and used CV pools, respectively, with an increase in loan internal rate of return (IRR) beyond 25%. For loans with IRR below 25%, 90+dpd delinquency stands at 1.8% and 0.7% for new and used CV loans, respectively.


LTV Key to Loss Reduction: At high interest rates, Indian CV originators limit loan to value (LTV) ratios. In case of new CV loans, at IRRs above 25%, LTVs of 80%-90% are offered to a very small percentage of borrowers. Similarly for used CV loans at high interest rates, LTVs drop to 50%-60% from 60%-70% indicating the use of LTV as a key loss reduction credit parameter. Thus, deploying higher interest rates is not a mitigating factor sufficient to address the risk associated with loss severity in CV loans.


Mixed Results at High LTVs: There is a clear contrast in the default behaviour of new and used CV loans at very high LTVs. New CV loans with the highest LTV show lesser-thanportfolio average delinquencies, arising from greater due diligence at the time of underwriting. However, the same strategy does not seem to be effective for used CV loans, which show significantly higher-than-portfolio average delinquencies at the highest LTVs.


Low Ticket Loans Most Risky: New and used CV loan pools with vehicle value below INR0.25m show a high average 90+dpd delinquency rate of around 3.1%. In contrast, new and used CV pools with vehicle value above INR0.75m show average 90+dpd delinquency rates of 1.8% and 0.6%, respectively. The rise in delinquencies at lower vehicle values indicates the weaker credit profile of borrowers who seek to finance commercial vehicles of smaller values. LCV Loans Perform Worse: India Ratings has observed that HCV loans show low delinquency rates at around half of overall weighted average (WA) 90+ dpd delinquency rates. New farm equipment and passenger vehicle loans show high 90+dpd delinquencies at 1.46x and 1.53x of the overall WA 90+dpd delinquency rates, respectively. Similar asset classes for used CVs show high 90+dpd delinquencies at 1.43x and 1.98x of the overall WA 90+dpd delinquency rates, respectively.


Delinquencies Lowest in Southern States: While originating standards remain broadly similar across various states, some states such as Andhra Pradesh (AP), Tamil Nadu (TN) and West Bengal (WB) show lower defaults than the portfolio average. States such as Maharashtra, Madhya Pradesh (MP), Uttar Pradesh (UP) exhibit higher defaults than the portfolio average. The variance can be attributed to the stronger presence of originators in southern states who form a significant portion of India Ratings’ rated pools, as well as to the strong repayment trackrecord of underlying borrowers.


AP, TN and WB have shown 90+dpd delinquency rates about three-fourth of the overall WA 90+dpd delinquency rates for India Ratings’ CV loan portfolio for new and used CV loans. On the other hand, Maharashtra, MP, UP and Orissa have shown 1.25x to 1.80x of the overall WA 90+dpd rates.


Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment



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First Published on Dec 12, 2012 06:45 pm
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