Delinquencies spiked in softer stress buckets after August, says Icra

Delinquencies in pooled retail loans saw a spike after the end of the moratorium in August, rating agency Icra said in a report on Tuesday. The spike was most noticeable in the under-90 days past due (dpd) buckets. Even as collections have improved between April and September in loan pools originated by non-banking financial companies (NBFCs) and housing finance companies (HFCs), they continue to trend below pre-pandemic levels, the report said.

Abhishek Dafria, vice president and head — structured finance ratings, Icra, said that the extent of migration of the softer bucket delinquencies to harder buckets (90+dpd) would depend upon the collection practices of the originators and improvement in the borrowers’ ability to repay. “Multiple originators, in their interactions with Icra, expect significant recovery from the delinquent contracts such that 90+dpd would not be higher than 5% (much lower for home loans and LAP asset class),” he said.

Icra expects that higher slippages in harder buckets would be a concern as past trends indicate that recovery from harder buckets would be difficult, given the impact of the pandemic on economic activity and repayment capability of retail borrowers.

Entities and pools with strong collection teams, a better geographical spread, rural borrower base and borrowers involved in essential goods or business activities have seen a better recovery in collections and have been less impacted. The harder bucket delinquencies (90+dpd) are expected to increase across asset classes over the next few months, as the softer bucket delinquencies have shown considerable rise in September 2020 when compared to the pre-moratorium period.

The extent of increase in harder bucket delinquencies would be dependent upon the incremental collections trend, borrower profile, residual tenure and asset class, Icra said. In the rating agency’s opinion, the originators would continue to focus, support and strengthen their collection efforts at a greater intensity during next few months to limit increase in the slippages and delinquencies.

Among the asset classes, home loans and loan against property (LAP) pools have reported the lowest slippages into softer buckets (0+dpd) when compared to other asset classes on account of improving collections and financially better borrower profiles. The delinquencies for commercial vehicle pools — including tractor and construction equipment sub-pools — have been the highest, particularly due to the impact of reduced inter-state transport following the lockdowns and relatively lower economic activity.

Notwithstanding higher delinquencies, Icra continues to observe a limited proportion of its rated securitisation transactions witness any material shortfall in collections to the extent that the cash collateral provided as credit enhancement has to be utilised. “The weak collections seen during the moratorium period, especially in April and May, did not result in any cash collateral utilisation for most transactions as the investors had provided a moratorium onto the PTC (pass-through certificate) payouts in line with the moratorium offered to the retail borrowers,” the report said. Only about 4% of the transactions in the rated portfolio witnessed cumulative cash collateral utilisation in excess of 10% as of September 2020.