Commercial vehicle loans at high interest rates more prone to default: Study

Commercial vehicle loans at high interest rates or with low ticket size more prone to default: Study

MUMBAI: Commercial vehicle loans at high interest rates or with low ticket size show higher-than-portfolio average delinquency rates, said a report by India Ratings.

At a high loan internal rate of return of above 25%, average delinquency rates for new and used CV loans can be at least 60% higher-than-average rates seen across the portfolio, said the report. However, originators tend to limit losses by keeping loan to value (LTV) ratios for such loans towards the lower side of the 60%-90% band."

"Originators tend to limit LTV ratios at high interest rates. This helps in reducing losses in the events of default, the likelihood of which is 60% higher at such rates than portfolio average defaults", says Arvind Rana, Analyst with India Ratings' Structured Finance Group. "This indicates that deploying high interest rates is not a mitigating factor sufficient to address the risk associated with loss severity in CV loans, which gives rise to the strategy of capped LTVs", adds Rana.