Despite improvement in collection efficiencies, delinquencies will continue to rise amid weak economic conditions, Moody’s Investors Service said on Thursday in a new report.

The report said that Indian asset-backed securities (ABS) performance risks will remain elevated over the next 12 months, as weak economic conditions will continue to hurt borrowers’ ability to repay loans.

At the same time, delinquency rates for rated auto and micro, small and mid-size enterprise (MSME) loan ABS also increased, indicating that some borrowers are not able to resume or sustain repayments amid the deep economic contraction triggered by the coronavirus pandemic.

“As payment moratoriums came to an end in August, collections in rated Indian ABS improved markedly in September and October, although they remain below pre-coronavirus levels,” says Dipanshu Rustagi, a Moody’s Assistant Vice President and Analyst.

“Given weak economic conditions, asset performance risks will remain elevated in this environment and we expect delinquencies in auto loan ABS and MSME loan ABS will continue to increase over the next 6 to 12 months,” he adds.

According to the report, over the next six to 12 months, the weakened economy will continue to hurt commercial vehicle and MSME borrowers' earning prospects and their abilities to repay loans in ABS portfolios. Asset performance risks will remain elevated in this environment and it expects auto loan ABS and MSME loan ABS delinquencies to continue to increase.

However, a new government support measure and existing transaction features will mitigate some of the risk.

In November, the Indian government announced a INR 2.7 trillion fiscal support package, which will benefit borrowers in the MSME sector. Government support measures and transactions features will mitigate asset performance risks for Indian ABS, though these risks will nevertheless remain elevated over the next six to 12 months.

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