Russia-Ukraine conflict likely to hit securitisation pool performance, report says

This could expose the industry to the risk of a higher loan to value ratio in case prices fall, and roll-overs on the existing loans may happen at higher interest rates.

The agency believes that the sustained high inflation and uncertain business environment are the major risks that can affect the microfinance industry. (File/Reuters)
The agency believes that the sustained high inflation and uncertain business environment are the major risks that can affect the microfinance industry. (File/Reuters)

The ongoing Russia-Ukraine war is likely to affect the securitisation pool performance with a lag, and the impact will vary across asset classes, says a report.

Stress, if any, in securitised transactions is expected to be visible in terms of lower collections and increased delinquencies in the first quarter of the fiscal 2022-23, India Ratings and Research said in a report.

“The ongoing conflict between Russia and Ukraine may affect the securitisation pool performance with a lag, and the impact will be varied across asset classes,” the agency said in its report.

With the rising fuel prices percolating down to retail pumps in March 2022, the agency believes the impact on the economy and households will start playing out in the first half of FY23, and the impact may get deeper, if such a geopolitical situation continues for a long duration, or if the intensity aggravates.

Consequent rating actions, if any, would be transaction-specific, dependent on the availability of internal and external credit enhancements and counterparty risks, it said.

For vehicle loans, the agency has a neutral outlook for fiscal 2023. It expects an increase in the cost of ownership due to higher fuel prices and input costs, affecting demand across the auto sector.

The rating agency said the increase in the freight prices proved to be the cushion that helped the commercial vehicle industry to protect margins to an extent in FY22. Also, vehicular movement has improved post-pandemic, which has increased the capacity utilisation levels.

“However, a sustained increase in fuel prices, beginning the second half of March 2022, may have a detrimental effect on business margins, thereby marginally increasing pool delinquency in securitisation payouts in the first quarter of FY23 onwards,” the report said.

India Ratings has maintained a neutral outlook for tractor loans for FY23. Russia and Ukraine are prominent producers and exporters of agriculture commodities and fertiliser suppliers for the world.

Supply chain and production disruptions can elevate prices of both raw materials and output for Indian tractor loan borrowers, the agency said, adding that the government-led direct and indirect subsidies may aid against such risks.

The agency believes that the sustained high inflation and uncertain business environment are the major risks that can affect the microfinance industry.

A rise in generalised inflation would be detrimental for borrowers’ financial condition in case of microbusinesses without pricing power. Also, repeat borrowers, on the face of possibly raising interest rates, may find themselves more indebted in the coming loan cycles, it said.

On gold loans, the report said that with the tag of being a safe asset, gold prices saw upward revisions at the onset of the crisis, before stabilising at historically high levels. It believes such valuations can bring in additional top-ups and new gold loan portfolio being originated, as was witnessed in FY21.

This could expose the industry to the risk of a higher loan to value ratio in case prices fall, and roll-overs on the existing loans may happen at higher interest rates, the report said.

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