Auto loan providers like HDFC Bank, Shriram Transport Finance, Mahindra Finance and AU Small Finance Bank report that the collection efficiency went above 90% in many cases in last few months, which is likely to see a slump in 2021.
Defaults on repayment of auto loans are likely to increase by 25-50% as compared to pre-pandemic levels in 2021, as a result of lag effect of macroeconomic stress, claims research and rating agency Fitch Ratings.
According to Reserve Bank of India (RBI), India’s total auto loan book stook at Rs 2.19 lakh crore at the end of August 2020, accounting for 8% of total personal loans of the country.
According to the study, net cumulative 90+ days past due (DPD) arrears of Indian auto loan securitisations could increase by 1.25-1.50. Interestingly, this comes after several auto loan providers in the Indian market including HDFC Bank, Shriram Transport Finance, Mahindra Finance and AU Small Finance Bank have reported that repayments have been normal and in many cases, the collection efficiency has gone above 90% as well.
As the study says, despite adverse cash flow, some of the borrowers may have built sufficient liquidity during the RBI moratorium to repay the auto loan, which started from September 2020. This resulted in improved collection rates for the lenders in the last three months.
However, the situation is expected to change in the next calendar year. Despite the gradual restart and recovery across sectors, the overall Indian economy is yet to take the pace of the pre-Covid level. Also, the two-years of prolonged economic downturn too is taking its toll on the economy that has suffered blows like a demonetisation couple of years ago.
According to Fitch, India’s GDP is expected to contract by 9.4% in FY21 before expanding by 11% in FY22 from a low base. Therefore, despite the eased flow of repayment to the auto loan providers in the last three months, the pace is likely to be slowed by half in the coming months.
The research agency expects borrowers will experience difficulty in making repayments over the next few months due to the stressed macroeconomic environment, lifting arrears in H1 CY21 with a lag effect. In all, the agency has projected a negative sector outlook on auto loans.
It further claimed that the current arrear positions do not reflect market reality. Arrear positions were frozen at the end of February 2020 and only resumed ageing once the moratorium period that was announced by the apex bank of the country ended.
At the end of September 2020, 90+ DPD arrears for the agency’s rated portfolio averaged around 1.4%, almost the same as the 2019 level of 1.3%. “The rise in arrears on the books of originators is likely to be more severe than that in securitised pools,” the study further mentions.