Millennium Post

Note ban hits small auto loans as repayments decline steeply

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.

Meanwhile, Finance Minister Arun Jaitley on Friday put up a spirited defence of demonetisation, saying the drive "shook" the financial system for a short while, but will integrate the shadow economy with the formal in the long run and ensure better tax compliance.

He said most contentious issues regarding the Goods and Services Tax (GST) have been sorted out between the Centre and states and the new indirect tax regime is at the final stages of implementation.

"This (demonetisation), coupled with GST, in the days to come will ensure much larger revenues as far as states and the central government are concerned and expand the size as far as the formal economy is concerned," Jaitley said at the CII Partnership Summit here.

Stating that India is largely a tax non-compliant society, he said states and the central government struggled with their revenues to run the system which created an unfair enrichment in favour of the evader.

"It also becomes very unfair on the normal taxpayer because what the evader manages to evade is what the compliant has to pay more," Jaitley said. The government, therefore, decided to demonetise the high denomination currency, "which shook the system for some time".

Jaitley said demonetisation has gradually increased the process of integrating the shadow, parallel and informal economies in far greater number with the formal economy.

"The size of the formal economy is expanding, so are the transactions in the banking system and through the digital mode," he said.

As for the implementation of GST, the finance minister said new indirect tax regime will make India one single market, eliminate multiple assessments, check evasion and bring more revenues into the system.

"I am glad that almost all state governments have actively co-operated in making this a reality. Most of the contentious issues have been sorted out in the GST Council, a forum where you will see deliberative democracy in action. Those are now at final stages of implementation," Jaitley said.

'Currency-to-GDP ratio to reach 9% by March-end'

Money in circulation is rising again in India post demonetisation and at the current rate, currency-to-GDP ratio will reach about 9 per cent by March –sufficient to stabilise economic activity, says a report.

According to Japanese financial services major Nomura, from 11.8 per cent of GDP on November 4, 2016 (pre- demonetisation), currency in circulation dropped to all-time low of 5.9 per cent on January 6; since then, it has risen for two straight weeks to 6.5 per cent as of January 20.

"This suggests that remonetisation is progressing well, as deposits of old notes into banks (currency outflow) has stopped (the window to deposit old notes ended on December 30), while the Reserve Bank is printing new notes (currency inflow) for circulation," Nomura said in a research note.

It believes that at the current pace, the currency-to-GDP ratio will rise to around 9 per cent by March end.

"In our view, this will be sufficient to stabilise activity since some part of the earlier cash was hoarded and partly due to a larger digital footprint," it added.
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