Credit rating agency Fitch has said that structured finance transactions in India are likely to remain stable this year,but has warned that delinquencies may rise in the commercial vehicle and equipment segments. Structured finance enables transfer of risk by avoiding complex legal and corporate entities as well as laws governing them. As applied to securitisation of various financial assets like mortgages,credit card receivables and auto loans,it has helped open up new sources of financing for consumers.
“Fitch Ratings expects transactions to continue to be broadly stable in 2012. Indian structured finance continued to exhibit stable performance,with all asset class transactions showing delinquency behaviour in line with initial expectations,” the ratings firm said in its report ‘2012 Outlook: Indian Structured Finance’. Fitch said the stable outlook is driven by a substantial build-up of credit enhancement. It cautioned,however,that delinquencies in commercial vehicle (CV) loans and commercial equipment (CE) loans may rise.
“Delinquencies are expected to rise in commercial vehicle (CV) loan transactions due to high financing costs,a slowdown in industrial activity and stressed margins of CV loan borrowers with rising fuel costs,” it said.
CE loan delinquencies may rise due to a likely slowdown in mining and infrastructure brought about by constraints on banking system and regulatory uncertainty.
“Continued interest rate hikes which affect industrial/ manufacturing activity could drive up delinquencies in CV and CE,while a substantial fall in interest rates or government stimulus could provide a positive boost,” Fitch said. It added,however,that both CV and CE loan transactions are expected to ride out the slowdown on the back of limited exposure to affected mining regions and a build-up of credit enhancement.
Fitch said its stable outlook on the Indian structured finance may change if the domestic economy shows further signs of moderation in growth.
“Fitch has already factored in moderating economic growth in India for 2012 and 2013. A more severe moderation of real GDP to below 6 per cent could have a significant impact across asset classes and result in outlooks turning negative,” the report said.
The report added that loans in the tractor segments may benefit from the government support for rural economy,and robust farm activity because of a good monsoon in 2011.
“The agency expects mortgages and residential mortgage- backed securitisation (RMBS) transactions to continue to benefit from high borrower equity,low instalment to income ratio,wage revisions in line with loan rate hikes and flexible repayment options,” Fitch said.