Commercial vehicle loans at higher interest or low ticket sizes more prone to default: Report

CHENNAI: Commercial vehicle loans at high interest rates or low ticket sizes are more prone to default says a new report by India Ratings. The delinquency rate in such cases is "higher-than-portfolio average delinquency rates", said the report. "At a high loan internal rate of return (IRR) of above 25%, average delinquency rates for new and used CV loans can be at least 60% higher-than-average rates seen across the portfolio," said the report."However, originators tend to limit losses by keeping loan to value (LTV) ratios for such loans towards the lower side of the 60%-90% band."
The report noted that low ticket size loans with vehicle value of less than Rs 0.25 million show a high average 90+ days past due (dpd) delinquency rate of around 3.1% for both new and used CV loan pools. In contrast, new and used CV loan pools with vehicle value above Rs 0.75 million show average 90+dpd delinquency rates of 1.8% and 0.6%, respectively. The higher default rates at lower vehicle prices indicates the weak credit profile of the borrowers in that CV segment. With more and more truck and bus makers focusing on the lower tonnage light commercial vehicle segment, this higher delinquency rate can be a source of concern for the industry that’s already battling demand slowdown in the medium and higher tonnage segments.
Interestingly while the trends are broadly similar across various Indian states, some southern states such as Andhra Pradesh and Tamil Nadu show lower delinquency rates than the portfolio average. On the other hand, states such as Maharashtra, Madhya Pradesh and Uttar Pradesh show higher-than-portfolio average delinquency rates. "The variance can be attributed to the stronger presence of originators in southern states, who form the major portion of India Ratings’ rated pools, as well as to the strong repayment track-record of underlying borrowers," said the report.
The report also found how financiers handle the higher risk in the lower price category loans. "Originators tend to limit LTV ratios at high interest rates. This helps in reducing losses in the events of default, the likelihood of which is 60% higher at such rates than portfolio average defaults", said Arvind Rana, analyst with India Ratings’ Structured Finance Group. "This indicates that deploying high interest rates is not a mitigating factor sufficient to address the risk associated with loss severity in CV loans, which gives rise to the strategy of capped LTVs", he added.