Securitised vehicle finance pools shrug off demonetisation with a ‘V’ rebound

Collections in securitised pools of vehicle loan receivables rated by CRISIL saw a V-shaped recovery in January 2017 collections (payouts made in February 2017), rebounding to ~95 per cent from ~85 per cent in November, and virtually shrugging off demonetisation. On the other hand, pools backed by microfinance (MFI) receivables are under stress and being closely monitored, while those backed by home loans have remained unaffected.

Demonetisation had hampered collections for most non-bank lenders in November and December 2016. Borrowers had also preferred to use cash for personal and business needs, rather than to service debt in those two months. Says Krishnan Sitaraman, Senior Director, CRISIL Ratings: “Most financiers quickly reoriented their collection strategy after demonetisation, such as focussing on educating borrowers on the benefits of using bank facilities, and reworking their collection cycles by spacing it out across the month. The collection trends in January are encouraging and seem to indicate that the impact of demonetisation has by and large played out in the vehicle financing space.”

Tractor pools, where loan repayments are based on the half-yearly crop cycle, were the worst hit in November. The demonetisation announcement coincided with the sale of kharif crop by farmers, which is typically the collection period. Such sales are cash-based, and shortage of currency meant farmers faced challenges in offloading their harvest. However, on the back of improvement in currency availability later, and recovery in agriculture trade, tractor collections rebounded significantly to ~100 per cent in January from ~ 70 per cent in November.

The housing loan segment remained unaffected, with collection efficiency stable ~99 per cent, because of minimal reliance on cash collections. The standard payment mode in this segment is post-dated cheque or electronic clearing service. In the loan against property (LAP) segment, CRISIL noted some volatility in collections, which is reflective of lumpiness in cash flows typically seen in the self-employed segment. However, no material dip was seen compared with a business-as-usual scenario.

The impact of demonetisation was more pronounced in the microfinance segment because of its cash-intensive nature of transactions. The modest collection performance was initially attributable to the cash crunch after demonetisation and local socio-political issues on the eve of assembly elections. Overall collections have dropped in November and December 2016 especially in Uttar Pradesh and certain districts of Maharashtra.