Demonetisation has significantly impacted the repayment capacity of small auto loan borrowers as their income has been adversely hit, says a report.
“Demonetisation appears to have had a negative impact on auto loan repayments with small auto loan borrowers have been affected the most,” Fitch Rating said in a report on Friday.
The government had announced to demonetise old high-value currency notes in November last year.
The report said borrowers were initially permitted to use demonetised notes for loan repayments, which helped in managing collections in November.
However, demonetisation has disrupted economic activities, particularly in the informal sector, and has hit the borrowers’ income, the report said.
“It is possible that collections will fall further in early 2017, and we believe it could take at least another two to three months before for collections to return to normal,” the rating agency said in the report.
The cash shortage has affected used-vehicle operators which generally have weaker credit profiles - more than the new-vehicle borrowers.
Pools backed predominantly by used-vehicle loans saw an average drop in collections of 130 basis points in November 2016, it said.
Those with a higher concentration of light and small commercial vehicles, which again have relatively weaker borrower credit profiles compared with medium and heavy vehicle owners, also dropped significantly - by almost 200 basis points, the report said.
The collection of pools securitised in 2016 fell by an average 120 basis points compared with 80 basis points for pools securitised before 2016.
More seasoned pools are on average likely to have more experienced borrowers, with a stronger ability to meet their repayments, the report said.
Furthermore, borrowers in seasoned pools will on average have serviced their loans for longer and have higher equity than those in less seasoned pools, leading to a greater willingness to pay.
Fitch said its rated auto loan asset backed security transactions remain resilient to a drop in collections. Only four transactions made any utilisation of credit enhancement in November, the report said.