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The COVID-19 pandemic has accelerated digitisation of processes among lenders and has reduced cash collections moderately, says India Ratings and Research (Ind-Ra) in its outlook.

Digitisation initiatives are also expected to help with better portfolio monitoring and in reducing soft delinquencies. The focus has shifted to building quality secured loan portfolios, upping process efficiency and automating customer follow-ups.

Ind-Ra has a stable performance outlook for the loans belonging to secured asset classes, factoring in an economic recovery in FY22. This would be aided by fiscal measures and an improvement in commercial activities, as vaccination roll-out improves people mobility.

Structural shifts in consumption behaviour and investment priorities are expected to stabilise default rates in secured loan pools to a level moderately higher than pre-pandemic levels. The agency however believes the performance of unsecured asset classes, such as microfinance loans, unsecured business loans and consumer loans, is worsening, given the borrower’s depleted financial cushions and the nature of these loans.

Moratorium has delayed the stress in these segments where delinquencies have not yet stabilised, and higher loan losses are expected to materialise in FY22.

This is also supported by the latest performance of Ind-Ra rated securitisation transactions consisting of the loan pools belonging to these asset classes.

The agency believes recovery momentum and continued policy support in FY22 will be key for loan performance. Indian securitisation transactions predominantly involve asset classes where the borrowers are either small and micro enterprises / businesses, or belonging to low- and middle-income households.

The severity of the impact of the pandemic on their income as well as the impact of the moratorium and fiscal measures on their credit behaviour is varied. Thus, the effectiveness and inclusiveness of government support schemes to improve the financial position of the end-borrowers is crucial and is a key monitorable, the agency added.

Although India avoided a second wave till February 2021, the possibility of reappearance of a contagion may not be ruled out as the infection count is increasing in March 2021. Given the roll out of vaccination, labour market and supply chain conditions are expected to remain benign in FY22.

But, an outbreak of a new variant that is not responsive to the current vaccination program or a slow vaccine rollout may bring in a potential uncertainty, speed-breaking the economic recovery and elevating pool delinquencies. In such a scenario, the degree to which the government is able to contain the spread without affecting economic recovery will be a key monitorable.

Asset Performance Outlook Varies: While vehicle loans, including loans for commercial vehicles, passenger vehicles and two-wheelers, has a stable asset performance outlook, given the pickup in economic activities witnessed in 2HFY21, tractor loans are expected to perform well, given the stability in the agriculture sector.

Small business loans are expected to witness differentiated performances depending on the loan type. Secured business loans (principally loans against property) also has a stable asset performance outlook, due to the borrower’s higher propensity to repay. However, unsecured business loans have started showing early signs of distress and have a worsening asset performance outlook.

Other unsecured asset classes including consumer loans and microfinance loans also have a worsening asset performance outlook, as the pandemic has significantly affected the low- and middle-income borrowers. The agency expects higher ultimate losses in these segments.

On the other hand, secured retail loan segments including home loans and gold loans have a stable outlook. Construction equipment also has a stable performance outlook, given government’s thrust on infrastructure for FY22.

Rating Stability Hinges on Pool Performance: Moratorium amendments, structural features and credit enhancement build-up in transactions have aided in rating stability although pool quality weakened in FY21.

Restructuring of loans are expected to be minimal in most asset classes except for unsecured business loans where select originators may see significantly high proportion of loans getting restructured.

Counterparty Risks: Counterparty-related stress has resulted in and can further affect the ratings of securitisation transactions. Ind-Ra notes that increasingly Indian securitisation transactions have their external credit enhancement in the name of the trust rather than in the name of the originator. The agency opines that timely servicer replacement on credit migration, in accordance with transaction documents, would bring in rating stability for securitisation transactions.

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