The performance of Indian asset-backed securitisation (ABS) transactions backed by commercial-vehicle (CV) loans should deteriorate further in the near term, after weakening significantly over 4Q13 and 1Q14, says Fitch Ratings. The deterioration has been affected by the general slowdown in the Indian economy and the significant hike in diesel prices - which have squeezed margins and undermined the debt-servicing capacity of CV loan obligors.

Average 90+ days past due rates of Fitch-rated CV loan ABS transactions have risen rapidly, to 3.7% for the February 2014 collection period, from 2.5% in September 2013. Transactions most affected by the deterioration in performance are those with significant proportions of loans originated in 2012.

One key indicator is the average diesel price for Mumbai, Chennai, Delhi, and Kolkata, which had risen by 14.8% to 59.7 rupees per litre by end-March 2014 from a year earlier. This is the highest price in the past 10 years, and is attributable partly to rupee depreciation. The high diesel and other input prices have continued to undermine CV operators' debt-servicing capacity despite generally higher freight rates in India.

These economic stresses mean that originators are taking longer to collect receivables. Fitch expects 180+ day delinquencies to rise modestly from the current rate of 1.1% for the February 2014 collection period.

Yet Fitch expects the rating performance of most transactions to remain stable, due to the sequential amortisation structure of the notes and significant build-up in credit-enhancement of transactions since origination. Current credit-enhancement stands at an average of 71% for 2012 transactions and 24% for 2013 transactions. It is strengthened further by excess spread, high recoveries from cash collection, and the strong incentives to avoid foreclosure on the part of the underlying small road transport operators, for whom their commercial vehicle is the primary source of their family income.