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Commentary

ICICI Commercial Vehicle Loans Downgraded

From FT:

The rating agency CRISIL has downgraded ICICI Bank’s securitised commercial vehicle loan pool worth over Rs 82 crore due to a drop in collections from repayments. The rating has been revised from “AA- (so)” to “BBB+ (so)”.

This is the second instance of downgrade for ICICI Bank in a span of 30 days. Last month, the private sector bank’s securitised car and personal loan pool worth over Rs 203 crore was revised downward from “AAA (so)” to “AA (so)” due to rising defaults on payments by borrowers.

Commenting on the downgrade, CRISIL said the performance of the pool has been marked by a higher-than-expected use of cash collateral. The cash collateral is an arrangement (cushion) for making payments to those who have invested in securitised paper when the collections for borrowers show a decline.

This pool was securitised in December 2005 and 27 months after securitisation, the pool amortised by about 78 per cent. The credit collateral stipulated at the time of rating was Rs 6.8 crore, of which around 79 per cent has been utilised. This level of utilisation is much higher than the rating agency’s expectations.

The delinquencies, including repossession losses in the loan pool, are also high at 8.6 per cent for 90-plus days.

SO ICICI Bank securitised some loans by pooling them together (I didn’t even know this was happening – but it’s good). The investors in this pool get a fixed rate of return as borrowers on the loans pay up their interest payments. When interest payments are lower than expected due to defaults, ICICI bank pays out of the cash collateral it has included in the pool. When that cash also runs out, the investors start to lose money (in order of the seniority of the tranches they purchased)

There must be other loans that are delinquent for less than 90 days, and that is likely to make the default hit higher than 8.6%.

This has a lower impact on ICICI bank – because it has sold the risk to other investors – but it takes a hit on the cash collateral and also on any tranches it still owns (the most junior are likely to be retained by the originating bank).

But the impact can be for the other such securitised loans or for future securitisations – as investors (most likely mutual funds and other institutions) will demand higher returns for the higher risk involved.

Are we getting into phase I of India-Subprime? Securitised loan downgrades are first signs of visibility – the loans that banks DON’T securitise are extremely opaque and delingquencies there are not revealed this publicly. But if this trend continues, defaults are going to be a serious issue going forward.

Some more: Citi sees rising NPAs

Citigroup on Thursday said it was not exiting the consumer finance business in India, but had decided to reposition its products due to a rise in defaults in recent months.

Refusing to disclose details, Citi India Chief Executive Officer Sanjay Nayar told reporters that non-performing assets (NPAs) in the consumer finance segment were much larger than expected, but added that business remained “satisfactory”.

Also read: Co-op bank NPAs rise, SBI credit card defaults cause concern, Banking sector shows good numbers in Q4.

  • Anonymous says:

    >Deepak – I commented earlier that Indian sub prime crisis will begin defintely and get accelerated into a phase, where it can be mind boggling, when the USD crashes to below 35. It looks too far and distant in the days of 43 Rs now, but one must remember that it took a mere month and half for crash from 43-44 to 39-40 levels an year or so ago.

  • Gunjan says:

    >Hi Deepak,

    ICICI has always been more of mass penetration story then customer oriented or customer concerned ones. The customer concerned ‘image’ is more with HDFC Bank.

    If one keeps aside ‘service’ part, then even today public sector banks (SBI, BOB, BOI etc) are front runners in their trustworthiness

  • Anonymous says:

    >I believe once cutomer starts using their interner banking services, some one will down grade their “services” as well. ICICI has very tricky password protection policy. If you don’t use your transaction password for over six months, they lock you out and to reactivate or reset the password they charge Rs375.oo ( to mail password to overseas address) and on the top it will take 9 days to get the password. Means person is stuck to execute a transaction for 9 days and costs money. First of all why they disable th epassword without warning? secondly even if they do, once requested over the phone, after screening for security, why can’t they just email at the registered email address?