Structured Finance

l
ABS/RMBS

Asset-Backed Securitisations Rating Criteria

Sector-Specific Rating Criteria

Inside this report Scope

Scope 1 This criteria report describes India Ratings and Research’s (Ind-Ra) analytical approach towards
Key Rating Drivers 1
Application and Limitations of the
ratings for Indian
Criteria 2
Asset Analysis 3 • asset-backed securities (ABS) transactions of vehicle financing loans, equipment loans,
Liability Analysis 13 microfinance loans, unsecured small business loans, gold loans and consumer loans
Counterparty Risks 14
Transaction and Legal Structure 16
• residential mortgage-backed securities (RMBS) transactions of granular pools of home loans
Forms of CE 17 and secured small business loans (also known as loans against property or LAP)
Legal Analysis 19
Rating Sensitivity Analysis 20 originated by Indian banks and non-banking finance companies (NBFCs).
Performance Analytics 21
Appendix 1: Overview of Indian The criteria report outlines the qualitative and quantitative factors considered by Ind-Ra while
Securitisation Transactions 23
Appendix 2: Other Structural assigning new ratings as well as monitoring existing ratings of Indian securitisation transactions.
Features in Indian ABS/RMBS 24
Appendix 3: Transaction Documents 25 Key Rating Drivers
Appendix 4: Information Expected
from Originators 26 Asset Analysis: Obligor default and recovery rates are key assumptions in Ind-Ra’s quantitative
Appendix 5: Simulation of the Gross analysis. Ind-Ra derives portfolio-specific default and recovery base-case expectations based
Default Rates 27
Appendix 6: Empirical Data Study 29 primarily upon originator-specific data but also taking into account the economic outlook, market
and peer comparison data.

Credit Enhancement: The stressed default and recovery assumptions are the key drivers of
credit enhancement (CE) levels in Indian securitisation transactions. The expected cash flows
from the securitised pool are analysed using base case and stress case scenarios for the three
key performance variables: defaults, recoveries and prepayments.

Liability Analysis: The nature of a transaction’s payment structure and cash flow allocations will
be a major driver in assessing CE adequacy and rating levels. Ind-Ra uses an internal cash flow
model customized to reflect the transaction payment structure and tests the impact of stressing
various assumptions, including prepayments, default timing, recovery rates, and recovery lag.

The outputs of the asset analysis and the transaction’s payment waterfall are used in Ind-Ra’s
This criteria report updates and replaces cash flow model to determine the rating level that can be achieved given the CE and liquidity
the previous version, dated facility (LF) levels provided in the transaction.
10 December 2018.
Counterparty Risks: The effective operation of the originator/servicer in collecting receivables
and distributing funds is reliant upon a number of counterparty relationships. Of specific
relevance, from a cash flow perspective, are the servicer (see also below) and account banks
holding the cash collateral or acting as a collection and payout agent.

Securitisation structures generally seek to minimise counterparty risk through diversification and
replacement procedures. The transaction documentation is reviewed to determine whether the
Analysts structural protections sufficiently reduce counterparty dependencies.
Prajeesh Jayaram
+91 22 4000 1742 Servicer/Operational Risks: Ind-Ra conducts an originator/servicer review aimed at
prajeesh.jayaram@indiaratings.co.in
understanding the policies, processes and practices in place. Based on the review Ind-Ra may
Vinit Gala make quantitative adjustments to default and recovery assumptions.
vinit.gala@indiaratings.co.in

Jatin Nanaware Transaction and Legal Structure: The transaction documentation is reviewed to understand
+91 22 4000 1761 the specific structural features and forms of CE available. Legal opinions are also reviewed to
jatin.nanaware@indiaratings.co.in
determine whether the transaction conforms to the legal assumptions such as bankruptcy-

www.indiaratings.co.in 26 November 2021

 Structured Finance
remoteness of assets and CEs in the event of bankruptcy or insolvency of the originator, isolation
of the special purpose entity (SPE) from the credit risk of the originator and compliance with
extant regulations and governing laws that Ind-Ra has relied on in its credit analysis.

Application and Limitations of the Criteria

Application of Criteria
Ind-Ra assumes that the securitisation portfolios of individual obligors (i) comprise a large
number of relatively small balance obligations, (ii) have products with relatively homogenous
characteristics, and (iii) contain a diverse range of obligors without any significant obligor,
regional or industry concentration. Ind-Ra will validate the applicability of such assumptions prior
to applying these criteria. Ind-Ra’s criteria are designed to be used in conjunction with
experienced analytical judgment exercised through a committee process. A rating committee
may adjust the application of these criteria to reflect the risks of a specific transaction or entity.
In case the portfolio of loans has minor deviations from the benchmarks suggested above, Ind-
Ra will apply suitable adjustments while assessing the default and recovery estim ates before
applying these criteria. To the extent that the portfolio of loans presents risks that cannot be
addressed by such adjustments, it may prevent Ind-Ra from rating such a transaction.

Specific asset-level, liability-level, legal or operational risks may prevent Ind-Ra from rating a
transaction or may limit the highest achievable ratings in the agency’s analysis. The core areas
where such restrictions may apply are generally those detailed in the latest version of the report,
Criteria for Rating Caps in Structured Finance Transactions, and available at
www.indiaratings.co.in. Specific examples include data of inadequate quality, insufficient
historical performance, absence of structural mitigants to address counterparty risks, and low
origination and servicing standards.

Data Adequacy
Ind-Ra relies on the accuracy of the historical performance data provided by the originator and
servicer supplemented by available market data to perform its credit analysis and to form a view
on the future performance which could be expected on a particular securitisation transaction.

Data Sources
The primary source of data for Ind-Ra transaction-specific analysis is the originator. The
originator is the source of the following data types:

• pool data (stratifications or loan level);

• historical performance data; and
• historical portfolio stratifications
Ind-Ra analysis will also be supplemented by market data provided by third parties, either directly
to the agency or via the originator, which may be the following data types:

• historical performance data of peer transactions;

• historical performance data of peer originators;

Data Quality
The rating approach outlined in this criteria report utilises historical performance data to form an
expectation of future performance. In some cases, historical data analysis may be deemed
inappropriate due to (but not limited to): (i) limited data availability, due to the duration of the data
series and/or the data series being derived exclusively from a benign economic period; and/or
(ii) a lack of granularity within the underlying pool; and/or (iii) a change in the origination practices
Related Criteria such that the historical data is not reflective of the securitised assets. In such cases, the agency
Structured Finance Rating Criteria will determine whether to apply this criteria report versus alternative ratings approaches. Any
(November 2021)
data limitations, rating caps, data adjustments or assumptions applied by Ind-Ra will be
Criteria for Rating Caps in Structured
Finance Transactions (November 2021)
highlighted in its transaction rating reports. Please refer to the latest version of Ind-Ra criteria
report, Criteria for Rating Caps in Structured Finance Transactions.

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Historical performance data are expected to display the performance of the obligors in relation
to the original contractual payment terms. Servicer/originator practices such as loan
modifications or loan refinancing (outside of the securitisation transaction) may lead to historical
delinquency and default levels being understated. In such cases, Ind-Ra expects to be provided
with additional data so that the impact of any such servicer/originator practices can be isolated
and excluded.

Asset Analysis
Ind-Ra’s asset analysis of the securitised pool is based on a four-step approach:

• Step 1. An originator and servicer review is conducted to evaluate the qualitative factors that
could impact the future performance of the securitised loan pool
• Step 2. Base-case assumptions are derived for key performance variables - defaults,
recoveries, collections and prepayments, based on historical data as well as the economic
environment and asset class outlook
• Step 3. Loan pool characteristics are analysed and suitable adjustments to base case
assumptions are made
• Step 4. Stressed scenarios are applied for the rating level

Originator and Servicer Review

Ind-Ra conducts a complete review of the originator and servicer associated with each
securitisation on a periodic basis, as deemed appropriate by the agency. The review will focus
on various aspects of the company and overall operations that could impact the quality of the
securitised loan pool, which may lead to a neutral or negative adjustment to the model results
derived from the data analysis undertaken by Ind-Ra.

The seven areas evaluated during the operational review include:

• Corporate overview, including financial condition, management experience and corporate

risk management;
• Origination and underwriting, collateral valuation/appraisal process;
• Servicing;
• Collections and default management;
• Staffing and training;
• Procedures and controls; and
• Technology and risk management

Corporate Overview
A thorough understanding of the company’s history, corporate structure, strategic objectives,
management experience and funding capabilities are fundamental to the operational review
undertaken by Ind-Ra. An assessment of the financial condition of the originator (and servicer, if
separate from the originator) is carried out by Ind-Ra Financial Institutions group, if there is no
public rating available across rating agencies on the originator/servicer. Ind-Ra performs a
reasonable check to establish the going concern of the originator for the tenure of the securitised
instrument.

Origination and Underwriting

The quality and consistency of the underwriting process is critical to the future performance of
the securitised loan pool. Ind-Ra review includes an understanding of the originator’s sourcing
practices and how vendors are selected and monitored. In assessing the underwriting practices
of the originator, Ind-Ra focuses considerable attention on the application receipt and data
verification process, the loan approval process and how credit authority is delegated
to underwriters.

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While both centralised and decentralised underwriting by originators has a demonstrated
success, Ind-Ra does review the control mechanisms for decentralisation of underwriting. The
agency also evaluates any conflicts of interest that can be inherent in the roles of the sales or
credit staff.

Some originators use credit scorecards to assist in the underwriting process. Credit scoring is a
method by which a large sample of defaulted loans is analysed to determine which variables are
statistically significant predictors of default, allowing the efficient and accurate credit assessment
of numerous applicants. Ind-Ra expects such credit scorecards to cover most of the key variables
to assess a borrower’s credit profile, and will consider the robustness and stability of such credit
scoring models over a period of time, and how and why these variables have changed over time.
The agency also expects originators to adhere to relevant lending regulations, employ money
laundering checks as well as customer identity and address verification procedures.

Ind-Ra will adjust its base-case assumptions to reflect changes in underwriting standards and
eligibility criteria.

Collateral Valuation/Appraisal Process

Borrower equity and the value of underlying collateral/properties are key components in
determining potential defaults and losses on securitisation pools. Therefore, the originator’s
processes and controls used in obtaining accurate and complete valuations strongly influence
Ind-Ra’s default and recovery assumptions. Originators that maintain credit department control
over the ordering of appraisal valuations have better control over the level of risk associated with
property values. Safe-keeping and handling of collateral (such as in gold loans) or collateral
documentation (such as property title documents in mortgages) in possession of the
originator/servicer is assessed by the agency.

As part of Ind-Ra’s assessment process, the originators’ approach to appraisal reviews, including
their use of third-party independent property valuers, field reviews, frequency of valuation and
corrective actions taken for inaccurate valuations, are reviewed. Ind-Ra assesses the adequacy
of the originator’s property/collateral valuation framework - processes, procedures and controls
used to approve, monitor and track new appraisers and their ongoing performance.

Servicing
In nearly all Indian securitisation transactions, the originator and servicer are the same entity.
This is mainly due to the challenges in implementing a third-party or backup servicer. Given the
pivotal role that the servicer plays in every transaction, particular attention is paid to a servicer’s
financial strength and ability to accommodate growth while maintaining collection and
repossession procedures.

Given that the originator is typically the servicer for the transaction, the servicing fees charged
are usually below market rates. Any transfer of collections to a backup servicer will likely result
in increased expenses. Therefore, Ind-Ra may assume a higher market rate in its cash flow
model to reflect the change in fees that could arise if the original servicer were to be replaced.

Collections and Default Management

During the review, Ind-Ra will evaluate the collection processes and loss mitigation tactics as
well as the servicer’s procedures surrounding enforcement and repossession of collateral. The
collections process should be flexible enough to allow the borrower sufficient time to pay the
arrears while ensuring that appropriate action is administered in a timely manner when non-
payment becomes inevitable. Along with tracking payment receipts, billings, insurance and
monitoring borrower contact, the servicer’s systems should also be able to generate information
management reports. As some of the processes undertaken by the servicer relating to collections
are automated, such as delinquency letters and calling schemes, Ind-Ra will assess the use of
these systems and may request demonstrations of the respective applications. The agency
reviews the proportion of collections that are historically witnessed through different modes such
as electronic collections and cash collections.

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As there are various ways to organise the collections department within a servicing organisation,
Ind-Ra will review the servicer’s specific structure, paying particular attention to how collectors
are recruited, trained and organised as well as the tools used to manage each collector’s
performance. Regardless of how the collections department is structured, Ind-Ra expects to see
experienced collectors handling the more serious delinquent accounts.

Ind-Ra reviews historical performance within the servicer’s existing portfolio as well as for
previous transactions. Furthermore, the agency will review timelines from default to recovery,
including the timeframe from actual possession to sale of the collateral. Attention will also be paid
to the write-off practices, including timelines, average write-off amounts, collection of shortfalls if
applicable and the approval process for authorising write-offs.

Staffing and Training

The tenure and experience of the underwriting and servicing personnel is reviewed along with
the organisational structure of these departments. The agency assesses the retail finance
experience of the underwriters, experience of the servicing staff in administering receivables and
the experience of call centre or branch personnel in collecting on secured and/or unsecured
loans.

Procedures and Controls

Documented policies and procedures for both underwriting and servicing are critical to ensure
that the corporate credit policies are followed. The originator should be able to adjust its policies
and procedures based on reviews of performing and non-performing portfolios. Ind-Ra will also
review the relevant reporting and decision-making procedures.

Quality control is another critical factor in Ind-Ra review of originators. The agency reviews the
level of exceptions to credit, which are a concern since they can indicate possible portfolio
deterioration. Internal audit procedures should also be in place as well to ensure compliance with
all company procedures and industry guidelines, and that appropriate follow -up action is taken
for exceptions.

Technology & Risk Management

As part of the review of the originator and servicer (either together or as separate entities), Ind-
Ra will evaluate the adequacy of IT systems used to support the management of the portfolio,
the administration of the receivables and the ongoing origination of accounts. The review will
include an understanding of the company’s IT infrastructure and how various applications used
for origination, underwriting and servicing interface with one another. Disaster recovery and
business contingency are also discussed as well as the company’s process for ongoing systems
development, and plans for upgrading or replacing existing systems.

The agency will not rate an securitisation transaction wherein the originator or servicer’s
capabilities and competencies are deemed to be inadequate to support the transaction.

Asset Characteristics
Having conducted the originator and servicer review, Ind-Ra analyses the specific asset
characteristics of the securitised pool. Ind-Ra assumes that securitised pool of individual obligors
(i) comprise a large number of relatively small balance obligations, (ii) have obligor profile
representative of the static pool data provided by the issuer. However, for relatively smaller sized
pools, the relevance of this criteria report shall be assessed on a case-by-case basis, depending
on portfolio composition and with consideration to additional factors as required.

The analysis involves qualitative and quantitative assessments of borrower-specific and loan-
specific features. For transactions with dynamic/revolving pools, the agency assumes the most
adverse loan pool, as per the loan eligibility criteria defined in the transaction.

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Borrower-Specific Features
Despite the introduction of credit bureaus in India, individual credit scores may still not be widely
available as non-bank lenders, who typically securitise loans, lend to unbanked customers,
making it challenging to assess the creditworthiness of securitised loan borrowers. Ind-Ra
therefore currently focuses on evaluating the originator’s underwriting criteria. Where additional
information is available, the agency will analyse the data; for example, breakdown of employment
profiles (employed/self-employed/housewife), fixed obligation-to-income ratios, historical
regional collection trends and consumer credit information reports.

Loan-Specific Features
Loan-to-Value Ratio (LTV)
High LTVs are associated with high default risk and high loss severity as there is less equity at
risk for the borrower and low equity cushion available to the originator. Given that high LTVs are
an indication of potentially aggressive lending practices, Ind-Ra compares the LTVs of the loans
in the securitised pool with the originator’s overall portfolio by LTV bands. If the securitised pool
shows higher LTVs, Ind-Ra will increase the base-case default rate for the transaction to adjust
for the higher default risk of the securitised pool. Other aspects of the collateral such the end-
use, property type, and the existence of an insurance cover are assessed and are critical for
collateral-heavy asset classes such as mortgages.

Loan Maturity
Longer loan maturities are associated with increased credit risk. There is not only a greater
likelihood of negative credit events occurring during a longer time horizon but also the possibility
that extended tenor loans are disbursed to borrowers with low affordability. Loan m aturity risk is
particularly pronounced in instances where the current value of the collateral is less than the
outstanding principal of the loan as a result of the asset depreciation rate being higher than the
loan amortisation rate. If the securitised pool shows significantly higher loan maturities, Ind-Ra
will increase the base-case default rate for the transaction to adjust for the longer maturity risk of
the securitised pool.

Bunching of loan maturities in a pool could be detrimental for securitisation transactions, as the
same can lead to liquidity shocks in transactions that securitise non-amortising loans. However
such cashflow risks get covered while modelling CE requirements or the provision of tail period
in the transaction, as per documentation.

Loan Size
Loan level exposures are an indicator of borrower concentration risk. Pools containing
commercial equipment loans tend to have high loan values compared to light commercial
vehicles (LCVs), and also often have a high degree of borrower concentration. Ind-Ra therefore
examines certain number of large borrowers by principal outstanding and the expected loss from
such accounts to assess whether the transaction’s CE for the rating level is sufficient to sustain
the default of a minimum number of borrowers. As a pool loans amortise and prepay, there is a
risk of increasing loan concentration as the loan count diminishes. To account for these risks,
Ind-Ra looks for a minimum CE support to be maintained for pass-through certificates (PTCs)
through the life of the transaction.

Borrower Geography
In certain asset classes like microfinance loans securitisation, the borrowers of a particular
geography are generally homogeneous in terms of financial literacy and credit behaviour. This
makes the transaction prone to idiosyncratic risks, especially in the wake of any unforeseen
trigger event even at the grassroots levels. Hence, analysing the transactions on the basis of
geographical concentration and the past track record of key geographies plays an important role
in arriving at adequate levels of additional credit protection at a desired rating level.

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Credit Score
In recent times, Ind-Ra has observed that a borrower’s credit score provided by the credit bureau
is a key decision variable in loan sanction models for quite a few asset classes such as home
loans, credit cards (currently credit card receivables cannot be securitised in India), unsecured
business and personal loans and consumer durable loans. A high weighted average credit score
and high percentage of credit score hits for an asset pool signify a healthy credit track record for
the underlying borrowers. This is more significant in the aforesaid asset classes since the loans
are of unsecured nature and post-default recoveries may not be significant.

Base-Case Assumptions
Having analysed the characteristics of the securitised pool, Ind-Ra establishes its base-case
assumptions on the following three key performance variables, which collectively impact the
credit risk in a transaction:

• gross defaults over the term of the transaction;

• cumulative recoveries on the defaults in the transaction; and
• monthly prepayment rates

To develop these assumptions, Ind-Ra expects to receive from the originator historical data on
the relevant asset class for three or more years or one loan cycle, whichever is higher, as detailed
in Appendix 4. The data is expected to reflect at least one economic stress period and the tenor
of the underlying assets in the securitised pool. If sufficient originator-specific information is not
available, especially for entities that have begun operations in the recent past or have launched
a product line recently, and stabilised levels of delinquencies cannot be gauged from the limited
vintage of operations, significant market-wide historical performance data, particularly for peers
in the same product line, covering at least the same timeframe may often provide proxy
information.

Static Pool Analysis

What is a Static Pool?

A static pool comprises a set of loans of a particular asset class that have been originated
with the same underwriting criteria during the same month, quarter or year. Ideally, all loans
originated in the same period are included in the performance data.

The performance over time, of a number of such static pools originated by the originator in
different periods, for each asset class, is assessed to arrive at the behaviour (delinquency
movements and prepayment rates) of the underlying loans.

Unlike an originator’s overall portfolio, which is dynamic due to the continuous introduction of
new loans, securitisation transactions are typically static in nature since they comprise a fixed
set of loans as of a certain cut-off date. By studying the performance of historical static pools
of an originator, Ind-Ra is able to form a view on the expected performance of the securitised
pool over the life of the transaction.

The static pool data provided by the originator is analysed with respect to various parameters
based on borrower and loan characteristics. Dynamic pool data can however facilitate
comparisons of delinquencies for sub-categories within the same parameter, e.g. LTV, IIR and
region.

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Economic Environment and Asset Class Outlook
While Ind-Ra recognises the importance of static pool data in calculating expected future
defaults, due consideration is also given to the economic environment. The agency therefore
also evaluates macroeconomic factors, including GDP components such as agriculture and
manufacturing, inflation, interest rates and oil prices as well as other measures of economic
activity such as the Index of Industrial Production (IIP). Asset classes such as commercial
vehicles, commercial equipment and construction equipment are sensitive to business cycles
and macroeconomic conditions.

In a growing economy, with sustained economic activity in core sectors, such assets tend to
perform well, with the underlying borrowers having a strong source of income, thereby improving
their debt servicing capacity. Conversely, changes in macroeconomic factors leading to a
slowdown in demand will adversely impact a borrower’s debt servicing capacity. Ind-Ra therefore
considers how deterioration in economic factors could impact the pool performance in terms of
defaults, recovery rates, collections and prepayments.

Default Probability
To determine the base-case default rate for the securitised pool, Ind-Ra reviews the historically
observed default rates of assets of the same quality and composition from the relevant originator,
pool-specific collateral characteristics and the level of seasoning and amortisation. Depending
on the availability of information, base cases are determined for each individual asset class in
the securitised pool.

Default Rate
The information on overdue loans in static pools provided by originators is typically net of
recoveries. The net default rate usually represents the total outstanding principal in the 90 days
past due bucket inclusive of recoveries, expressed as a percentage of the initial principal. In
certain asset classes like microfinance loans or unsecured loans, early delinquency indices of
equal to or more than 1 day past due or more than 30 days past due may also act as a proxy for
net default rates. This is because, generally, if a borrower moves in to delinquent buckets, a
rollback to standard account status is difficult for these asset classes. In other asset classes such
as tractor loans which have a quarterly or semi-annual repayment frequency, the agency
considers 180 days past due as definition of default. The precise number of days past due
depends on the set definition of default in the transaction documentation. For asset classes such
as commercial vehicles and commercial equipment, which in the past have had high recoveries,
the net default rate significantly underestimates the gross default rate. The steps below detail
how Ind-Ra determines a base-case gross default rate.

• Ind-Ra first examines the performance of the static pools in terms of peak net default rates
based on the number of months since origination and the level of amortisation.
• By analysing the origination year of the securitised pool and mapping it to the peak net
default rates of the loans of the same vintage in the static pools, the base-case net default
rate (BCD) is obtained
• Ind-Ra then adjusts the BCD based on various qualitative and quantitative factors. Potential
reasons for adjustments include changes in underwriting or servicing standards and
differences in asset characteristics of the securitised pool compared to the static pools. The
details of the adjustments to the BCD due to such factors are mentioned in the Originator
and Servicer Review and Asset Characteristics sections
• The BCD is expected to address the potential impact of the macroeconomic environment on
the future performance of the securitised pool. If the historical data already incorporates a
severe stress period, such that the base case is not expected to be exceed despite
macroeconomic deterioration, no further adjustment would be made to the BCD. However,
if macroeconomic indicators such as GDP, IIP and other forecasts suggest that economic
activity is expected to deteriorate materially from historical averages, then upward
adjustments are made to the BCD. Such adjustments may be formulated following
discussions with rating analysts of the relevant Ind-Ra Corporates sector group or Financial
Institutions group
• The BCD is then grossed up by simulating a base-case gross default rate based on the
historical recovery rate range observed for the specific asset class. The procedure adopted
by Ind-Ra to simulate the base-case gross default rate is detailed in Appendix 5

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Seasoning and Amortisation
While seasoning (the amount of time that borrowers have already made payments on a loan pool
since origination) can be an indicator of credit behaviour of the pool, it should be studied in
conjunction with the proportion of amortisation that has taken place in the securitised pool. Ind-
Ra will only adjust for seasoning where at least 20% of the securitised pool has already amortised
with no delinquencies. For long tenor assets such as mortgages, the agency considers seasoning
where either 20% of the loan amount has amortised or if 24 months of seasoning has elapsed.
The adjustment for seasoning will be influenced by a number of factors, including loss speed,
shape of the default curve and the underlying credit collateral quality.

Recoveries
Once a loan has been classified as defaulted, usually a recovery procedure is undertaken on the
underlying asset. The recovery rate is defined by the total liquidation proceeds over the
outstanding balance of the defaulted loan.

Ind-Ra reviews historical recovery information to estimate the net proceeds received from the
liquidation of the underlying asset and the recovery timing process. A static data analysis is
conducted, with the time of default being the starting point for the recovery vintages, to es timate
how long it takes to collect the recoveries from the defaulted assets. Ind-Ra also forms a view on
recoveries from other data provided by the originator or from recovery data provided by other
entities in the same asset class and similar regions of operations. Some loans classified as
defaulted can become current through continued collection efforts past the definition of default.
The agency only gives benefit to this type of recovery where the collection history presents a
consistent recovery trend.

Ind-Ra therefore determines its base-case assumptions for recovery rates and recovery timings
based upon available historical information. The base-case recovery rate and recovery timing for
the securitised pool is further adjusted based on certain interrelated factors, which have been
mentioned below:

Recovery Policy
Once a loan account has become delinquent, the servicer/originator can follow a distinct
collection strategy depending on the delinquency bucket the borrower is in as well as the size of
the delinquent amount. The success of the recovery strategy depends not only on the experience
and expertise of the servicer, but also on macroeconomic factors and regulatory guidelines
regarding collections. For instance, a recovery policy focused heavily on repossessions of the
underlying assets will be more sensitive to economic conditions than an alternative strategy that
is based on cash recovery by means of negotiations, which will be more sensitive to regulatory
guidelines on recovery proceedings. Other than an analysis of the roll back in delinquent loans
post default, as indicated by static pool, for mortgages, the agency will also assess the
aggregated recovery rate and recovery time for cases where enforcement notice was issued.
The percentage of loans written-off as a proportion of defaulted loans also gives an indication of
recovery rates.

Collateral Characteristics
Certain vehicle and equipment attributes such as the age of the asset (new or used), expected
life of the asset, purpose of usage (commercial or personal) as well as the physical condition
affect the market value of the asset. Recoveries from liquid collateral (such as gold) and in the
possession of the lender are considered to be more certain and timelier. For mortgages, variables
such as property type, occupancy status and property insurance shall as well be considered.

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Macroeconomic Conditions
In periods of high economic growth, the demand for underlying assets such as commercial
vehicles, residential/commercial property and commercial equipment is usually high and so
higher recoveries can be expected. Conversely, in periods of economic slowdown, demand in
the auction market is likely to be weaker, leading to lower recoveries. If macroeconomic indicators
such as GDP, IIP and other forecasts suggest that economic activity will deteriorate materially
from historical averages, then appropriate caution is exercised by the agency while estimating
the default proxies for the tenure of the transaction. Such adjustments may be formulated
following discussions with rating analysts of the relevant Ind-Ra sectoral groups.

Prepayments
Prepayments occur when borrowers pay part of their loans before the scheduled payment date.
The two key drivers of prepayment behaviour are the availability of cheaper refinancing options
and an increase in disposable income levels after a change in personal financial circumstances.
On a relative basis, premium structures are significantly more sensitive to prepayments than
par structures.

Ind-Ra reviews available dynamic and static prepayment data provided by the originator to
understand the history of average prepayments for the particular asset class. If prepayment data
is unavailable, Ind-Ra assumes a prepayment rate based on information available on similar
asset classes from other originators, considering the prevailing and expected interest rate
environment.

Figure 1 Stress Scenarios

Gross Default Rate Stress After developing base-case assumptions for gross defaults, recoveries and prepayments, Ind-
Multiples – All Asset Ra stresses these variables and applies a yield compression stress for the rating level. Also, Ind-
Classes Except Ra may perform an additional stress analysis using updated assumptions during the periods of
Microfinance Loans unforeseen macroeconomic or industry developments, as detailed in the latest version of
Rating category Multiple (x) Structured Finance Rating Criteria.
IND AAA(SO) 4.00–5.50
IND AA(SO) 3.00–4.00 Gross Default Rate Stresses
IND A(SO) 2.30–3.00
IND BBB(SO) 1.80–2.30 The stresses shown in the table (Figure 1 and Figure 2) are applied to the base-case gross
Source: Ind-Ra default rate for securitisation ratings to arrive at the stressed default rate. Ind-Ra’s rating analysis
uses stress multiples to establish a degree of remoteness from the base case assumption that
is appropriate for the assigned rating level. It addresses the risk that actual default performance
may be worse than the base-case assumption. The stressed assumptions are intended to
provide a basis to account for the impact of economic deterioration on the transaction’s cash
flows.

Figure 2 Notch-specific default rate stresses are derived by linear interpolation between the stresses
Gross Default Rate Stress applicable to adjacent rating categories. As there are usually two notches between rating
Multiples – Microfinance categories, the steps between notches are one-third of the difference between the categories.
Loan
Rating category Multiple (x) While the above range of stresses provides a tool to reflect the expectation that different portfolios
IND A(SO) 4.00–5.50 will respond differently to economic deterioration, Ind-Ra highlights that the application of higher
IND BBB(SO) 3.00–4.00 stresses does not negate the importance of adequate origination and servicing practices, as well
IND BB(SO) 2.30–3.00
IND B(SO) 1.80–2.30 as the availability of sufficient and reliable historical data when setting base case expectations.
Source: Ind-Ra In the absence of adequate origination and servicing practices and/or adequate data, Ind-Ra may
be unable to derive base-case expectations with a sufficient degree of robustness to apply this
rating approach, and in such an event, a rating cap will be applied to the transaction.

For specific transactions, a rating committee may choose to use a stress multiple at the higher
end of the range or higher than the range mentioned in Figure 1 (or Figure 2 as applicable), on
a case-to-case basis, based on the qualitative factors mentioned below:

1. Originator has less established underwriting and servicing capabilities or the servicer has
weaker financial standing

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2. Originator/originator category has exhibited volatile historical loss performance
3. If the base case default, defined to cover the default performance expectation for the term
of the transaction, is lower than the long-term average default performance of the originator
Conversely, stress multiples at the lower end of the range will be used for well-established
originators with substantial historical performance data exhibiting consistent and low historical
volatility of loss levels.

The stress multiples have been validated against historical peak default data of structured
finance transactions. The details of the empirical study are shown in Appendix 6.

Adjustments to Gross Default Stress Multiples

Additional stresses outside of the standard multiples shown will be applied to address risks
associated with limited availability of static pool data. If Ind-Ra base-case gross default rate
already incorporates a severe stress period observation, the agency will reduce the multiple
applied on a case-to-case basis such that the severe situation stressed default rate is equal to
or higher than the non-severe stressed default rate. Similarly, for high credit risk assets, the
multiples may be lower, as the base-case gross default rate in these portfolios already reflects
the inherent riskiness of the asset class.

As part of Ind-Ra performance analytics process, the agency will assess the economic outlook
and its likely impact on future asset performance. During periods of significant stress, Ind-Ra will
re-assess the potential for further deterioration in asset performance. This may lead to an
increase in Ind-Ra breakeven CE for certain rating categories, reflecting changes in its view of
their relative proximity to default. For high investment-grade rating categories, Ind-Ra revised
breakeven CE may rise less proportionally than for lower rating categories as long as the high
investment-grade categories are still expected to be relatively remote from default compared to
lower rating categories.

Default Timing Stress

The timing of defaults has a significant impact on the performance of a transaction. For example,
in a par structure, if the defaults are front-ended, the excess spread available to the transaction
is reduced.

Ind-Ra formulates its default curves using historical performance data to observe trends exhibited
by static pools and fully seasoned securitisation transactions. The agency employs various
default timing scenarios depending on the weighted-average life (WAL) to assess the ability of
the structure to withstand various clusters of defaults at three different points in the transaction
lifecycle: front, middle and back. As an example, the default timings used for a pool with a WAL
of three years would be as follows:

Figure 3
Illustration of Default Timings for Pool with WAL of Three Years
Year Front Middle Back
1 60 25 0
2 40 50 40
3 0 25 60
Source: Ind-Ra

Figure 4
Recovery Rate Scaling Recovery Rate Stresses
Factors for Secured Loans Ind-Ra recovery rate stresses recognise the pro-cyclical nature of defaults and recoveries, with
Rating category Stress case (%) lower recoveries occurring during periods of higher defaults. Therefore, in transactions backed
IND AAA(SO) 60
by secured loans, Ind-Ra assumes that the asset recovery rate is inversely related to the rating
IND AA(SO) 70
IND A(SO) 80 level. The scaling applied to recoveries at the different rating levels is as shown in Figure 4. For
IND BBB(SO) 90 mortgage pools, the stressed recovery rates are arrived at by stressing the property prices,
Source: Ind-Ra
considering the haircuts that are calibrated depending on the property location and the property
type.

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Adjustments to Recovery Rate Stress
Adjustments will be made to the standard scaling factors in Figure 4, to address risks associated
with availability of historical data. If Ind-Ra base-case recovery rate already incorporates a severe
stress period observation, the agency will reduce the scaling factors.

Recovery Timing Stress

In the same way that the allocation of defaults over time affects the use of excess spread as it
flows down the waterfall, the generation of recovery over time matters. Ind-Ra determines its
recovery timing assumptions based on the historically observed time to recovery as well as the
rating level. The recovery timings that Ind-Ra uses typically for commercial vehicle financing
transactions are shown below.

Figure 5
Recovery Timings
Rating category Months
IND AAA(SO) Base case timeline +5 to 6 months
IND AA(SO) Base case timeline +4 to 5 months
IND A(SO) Base case timeline +2 to 3 months
IND BBB(SO) Base case timeline +1 to 2 months
Source: Ind-Ra

For mortgages, where legal enforcement and ultimate recoveries may come in with substantial
delays, the recovery delay and its volatility can be considerable. The agency assumes the base
case recovery delay based on the historical aggregated recovery time for cases where an
enforcement notice was issued by the originator.

Figure 6 Prepayment Stresses

Prepayment Stress Ind-Ra will stress base-case monthly prepayment rates for the relevant rating level. The stress
Multiples for each rating category will depend on the portfolio’s yield, current interest rate environment,
Rating category Multiples (x) competitive landscape and economic factors. Considering the sensitivity of premium transactions
IND AAA(SO) 2.00–2.50 to prepayments, Ind-Ra assumes a higher prepayment rate for premium structures compared to
IND AA(SO) 1.50–2.00
IND A(SO) 1.20–1.50 par structures. The monthly prepayment stress multiple ranges that Ind-Ra uses are shown on
IND BBB(SO) 1.10–1.20 the left. These stress multiples have been validated against historical prepayment data of Indian
Source: Ind-Ra structured finance transactions. The details of the empirical study are shown in Appendix 6.

In a transaction with a pro-rata pay structure, a fast prepay environment would allocate more
unscheduled principal to the senior tranches, allowing the senior PTCs to pay down more rapidly
and subordination (loss protection) to grow quickly. In contrast, in a slow prepay scenario, the
senior bonds do not deleverage quickly while the scheduled principal is allocated to the
subordinate bonds, leaving less loss protection in a backloaded default timing scenario. To
account for these risks, Ind-Ra models both high- and low-speed prepayment scenarios, if
appropriate.

Figure 7 Yield Compression Stresses

Yield Compression Stress To address the risk of relatively higher interest rate loans in the securitised pool either prepaying
Rating category Top borrowers (%) or defaulting, Ind-Ra applies a yield compression stress to the pool yield.
IND AAA(SO) 40
IND AA(SO) 30 The agency reviews the yield distribution of the assets in the securitised pool and assumes a
IND A(SO) 20
IND BBB(SO) 15 certain percentage of borrowers (depending on the rating level) with the highest interest rate
Source: Ind-Ra loans will either prepay or default. The percentage reduction in the pool yield is then deducted
from the month-on-month weighted-average pool yield and applied to the interest collections in
Ind-Ra cash flow model. The yield compression stresses that the agency uses are shown in
Figure 7.

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Liability Analysis
Ind-Ra uses its cash flow model to test whether the stressed asset cash flows, as well as the CE
and LF provided in the transaction, are able to cover the timely interest and timely principal
payments on the rated PTCs.

Cash Flow Modelling

Ind-Ra cash flow model considers two sides of the transaction: the assets and the liabilities.

The key assumptions for the asset side of the cash flow model are the base-case gross default
rate, timing of defaults, recoveries, pool yield and prepayments. These assumptions are subject
to rating-specific stresses within the cash flow model to reflect the various stress scenarios that
affect principal and interest collections received from the assets in each period.

The stressed asset cash flows are then applied to the liability side of the cash flow model based
on the priority of payments/waterfall set out in the transaction documentation. The liabilities of
the structure typically include fees and expenses as well as payments due to PTCs. Securitisation
transactions typically incorporate a combined waterfall structure where principal and interest
collected from the loans are merged and distributed according to a single priority of payments.

Figure 8, Figure 9 and Figure 10 detail the main steps incorporated in Ind-Ra cash flow model
for a typical securitisation transaction.

Figure 8

Asset Side: Stressed Asset Cash Flows

Opening Principal Balance

Defaults: The principal outstanding of loans which default in a current period depends on the stressed
default assumptions and default timelines.

Prepayment: The principal outstanding of loans which prepay in a current period depends on the
prepayment assumption and the non defaulted principal outstanding.

Principal Amortisation: The principal collected in the current period depends on the amortisation
schedule, outstanding principal after defaults and prepayments.

Actual Interest Collections: The interest collected in the current period depends on the principal
outstanding after defaults, scheduled pool yield and yield compression assumptions.

Recoveries: Recoveries from defaulted loans with a recovery lag.

Ending Principal Balance: The Opening Principal Balance minus prepayments, defaults and principal
amortised in the current period.

Stressed Asset Cashflows: Sum of prepayments, principal amortised, interest collections

and recoveries.

Source: Ind-Ra

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Figure 9

Liability Side: Expenses and Payouts

Costs & Expenses: Trustee Costs, Servicer Fees & other miscellaneous costs.

Cashflow Available for Investors: Stressed Cashflows minus Costs & expenses.

Principal to be Paid: Depends on the PTC principal outstanding and the liability amortisation
schedule at closing.

Prepayment to be Paid: Depends on the structure (Par/Premium) and the prepayments in

the underlying pool.

Interest to be Paid: Depends on the PTC Principal Outstanding and the investor yield.

Source: Ind-Ra

Figure 10

Assets vs. Liabilities Analysis

Shortfall for PTC/Payout Dues in Each Period

Shortfall on Account of 0-90 dpd Loans Shortfall on Account of Defaulted Loans

Excess Spread Benefit/Overdue Collections Excess Spread Benefit/Overdue Collections

Ind-Ra Breakeven Liquidity Facility Ind-Ra Breakeven Credit Enhancement

vs vs

Liquidity Facility Provided Credit Enhancement Provided

Source: Ind-Ra

The stressed asset cash flows are applied to the specified liability waterfall. The shortfall in each
period is calculated to determine whether the CE and LF provided in the transaction exceed Ind-
Ra breakeven CE and LF amount. If so, the transaction has sufficient CE and LF to meet the
contracted payment of interest and principal for the rating level.

Counterparty Risks
Counterparty risks arise in all situations where the transaction places either operational reliance
or dependency on payment obligations from counterparties or other supporting parties. These
parties can include the originator, servicer, corporate undertaking or guarantee provider and
account bank as well as an interest rate swap provider.

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Ratings of securitisation transactions are dependent on the financial strength of certain
counterparties other than being directly linked to the performance of the securitised pool. To
address the issue of counterparty risk, transaction documents typically include structural
mitigating factors that aim to reduce the reliance on specific counterparties. In transactions, this
has often taken the form of minimum rating thresholds (“rating trigger”), where it is specified in
the transaction documentation that upon the loss of a minimum rating the counterparty will take
certain remedial actions. Depending on the counterparty function, these actions usually include
replacement with another counterparty or finding an eligible guarantor.

Ind-Ra Financial Institutions group is closely involved in assisting in monitoring counterparty risks
in securitisation transactions. Rating committees may consider the specifics of a securitisation
transaction and could decide that the counterparty is not suitable for a particular exposure at the
highest rating levels even if the counterparty appears to meet the criteria. W here such exceptions
to criteria arise, the circumstances and rationale for the decision will be fully described and
explained in Rating Action Commentaries and any transaction reports that accompany the rating
action.

Originator
The originator exposes the transaction to both CE risk and set-off risk.

CE Risk
The risk emanates from the possible obstacles in accessing the CE held in the name of the
originator. In many securitisation transactions, the cash collateral and LF amount are often held
in a bank account in the name of the originator with a lien marked to the trust. The originator
typically provides a letter to the account bank, which lien marks the bank account in favour of the
trustee/investor. This letter also instructs the account bank to operate the bank account solely
upon the written instructions of the trustee/investor. Transaction documents usually specify that
in the event that the originator is downgraded below a certain threshold, usually an ‘IND A1’ or
‘IND A’ level, all monies held in the bank account are usually transferred to a newly established
bank account in the name of the trust within 30 days.

Set-Off Risk
The representation and warranties provided by originators usually state that the borrowers do
not have any right to set off their liabilities specified in the underlying loan agreements against
any deposits maintained by them with the originator. If borrowers do proceed to set off, the
originator typically has the right to repossess the underlying asset. Alternatively, if the origi nator
were to default, the transaction would also be exposed to potential set-off risk. The mitigation of
set-off risk is contingent upon the exact nature of the set-off exposure and the credit strength of
the originator. Where significant set-off exposure exists, Ind-Ra will assess the mitigating factors
that have been structured into the transaction (if any). In the event set-off risk is evident and the
risk has not been reduced, the rating of the transaction could be capped as it may not be possible
for the transaction to be effectively isolated from the risk of the originator. Please refer to the
latest version of Ind-Ra criteria report, Criteria for Rating Caps in Structured Finance
Transactions.

Servicer
The servicer can expose transactions to both commingling and operational risk through the
servicing functions.

Commingling Risk
Monthly collateral collections are usually held in accounts with the servicer before being paid to
investors as interest and principal. In an insolvency or bankruptcy event of the servicer,
collections belonging to the trust/purchaser can run the risk of being commingled with the
defaulting servicer’s estate if it is not fully isolated. In addition, any redirection of funds would
take a certain time while borrowers may continue to pay into the original collection account.
Transaction documents often aim to limit the extent of the commingling period to the next payout

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date if the servicer is rated at least ‘IND A1’ and ‘IND A’ or daily sweeps depending on the rating
of the servicer. In case transaction documents do not mandate such risk mitigants, the rating of
the securitisation transaction may get partially linked to the servicer’s credit rating.

Operational Risk
Some transactions include a servicer replacement event where if the servicer’s rating falls below
‘IND A1’ or ‘IND A’ then investors can decide to replace the existing servicer with a new servicer
within 30 calendar days. In the absence of a servicer replacement event, Ind -Ra will assess the
other mitigating factors that have been structured into the transaction.

Account Bank/Designated Bank

The account bank often holds the cash collateral (CE), the LF amount and/or the SPE’s account
used to pay investors. To limit the account bank exposure, transaction documentation usually
specifies that the account bank will have to be replaced within 30 days if it gets downgraded
below a certain rating threshold, usually set at ‘IND A1’ or ‘IND A’. If transactions have ‘excessive
account bank dependency, it is expected that such risks are suitably mitigated by remedial
measures.

Corporate Undertaking or Guarantee Provider

If CE is provided in the form of a corporate undertaking or guarantee (including adequate draw
down provisions - see below), the rating of the PTCs will be analysed in a manner similar to that
for Account Bank as described in the previous section. If the entire CE is provided by a single
counterparty leading to excessive dependence on the counterparty, the rating of the PTCs will
be capped at Ind-Ra rating of the corporate or guarantor.

Guarantees by nature are less easily replaceable than fixed deposits placed with account banks
on the counterparty becoming ineligible. In such cases, it is expected that, within 14 days from
such downgrade of the guarantor, if a replacement guarantee is not arranged from an eligible
counterparty rated at least ‘IND A’/’IND A1’, the original guarantee will be drawn down fully and
the cash placed in a fixed deposit with an eligible counterparty within 14 days.

Absence of Event Based Triggers in Transaction Documents

In case the transaction documents do not contain the aforesaid triggers related to the rating of
counterparties involved, Ind-Ra will mention appropriate triggers at the time of rating the
transaction in the rating action commentaries or any transaction reports that accompany the
rating action. The same shall govern the transition in rating of the SF instrument in accordance
with the transition in rating of the counterparties involved in the transaction.

Transaction and Legal Structure

Ind-Ra reviews the transaction documentation to understand the specific structural features and
forms of CE available in the transaction.

Structural Features
Key structural features that have been incorporated into securitisation transactions include
the following.

Par & Premium Structures

Securitisation transactions incorporate either par or premium structures. In a par structure, the
securitised pool is assigned to the trust for a purchase consideration equal to the pool’s principal
balance. In contrast, in a premium structure, the securitised pool is assigned for a purchase
consideration in excess of the value of the pool’s principal balance. The principal on the PTC is
derived by discounting the total scheduled cash flows from the pool at a fixed PTC yield, thereby
allowing the originator to monetise upfront the value embedded in the future interest receivables.

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Premium structures are inherently riskier than par structures given the following features.

• The PTC principal balance is greater than the pool’s principal balance (under-
collateralisation at the onset of the transaction)
• Each interest payment received from an underlying loan asset effectively represents a partial
principal payment to PTC investors. Any significant variation in the interest payments of the
underlying loan assets and the expected cash flows could therefore result in a loss of PTC
principal. The variation could arise from delinquencies, defaults or prepayments
• No excess spread is available for the benefit of the transaction

Given the risks and sensitivities mentioned above, Ind-Ra breakeven CE for a premium structure
is higher than that for a par structure.

Loan Transfers
An alternative to the PTC structure is transfer of loan exposures through a direct assignment or
any other loan transfer structure where there is a bilateral agreement to transfer loan receivables
from the originator/seller directly to the investor/purchaser. In the absence of a trust and PTC
issuance, the purchaser of the specific pool receives the scheduled interest and principal payouts
directly from the originator/seller. In direct assignment transactions, Ind-Ra provides its estimate
of potential losses in the underlying pool principal in the form of a loss assessment report which
looks at only the cash flows expected from the pool of loans post default and recovery. This
private assessment is a one-time exercise and will not be kept under surveillance by Ind-Ra.

Ind-Ra has previously assigned ratings and continues to maintain credit ratings on direct
assignment transactions that have a provision of CE in them. Such direct assignment of loan
pools with CE features (as regulatorily permitted) are assessed by the agency and credit ratings
are assigned as per these criteria.

Liquidity Facility
Many securitisation structures incorporate a separate LF provided by the originator or a third
party at the onset of the transaction. The LF is available to be drawn down from the account bank
to protect the transaction against any shortfall on account of loans in the overdue bucket but
have not yet defaulted. Any draw down of the LF is usually temporary in nature and therefore
reimbursed on the subsequent payout date at the top of the transaction waterfall. The LF
therefore does not provide any CE to the transaction.

To determine whether the LF amount in the transaction is sufficient for the rating stress level,
Ind-Ra uses a cash flow model to analyse stress scenarios of the current and overdue collection
efficiencies. The base case collection efficiencies are derived using historical collection trends
observed in the static pools provided by the originator and the performance of transactions under
surveillance.

In transactions where no separate LF is provided, Ind-Ra breakeven CE is higher as the available

CE will be used to cover any cash flow shortfalls on account of both credit losses as well as any
liquidity shortfalls on account of temporary delinquent loans.

Other structural features often incorporated in Indian securitisation transactions are mentioned
in Appendix 2.

Forms of CE
CE can be classified into two forms – external and internal. External CE is provided by cash
collateral, guarantees and corporate undertakings while internal CE is provided by excess
spread, subordination and over-collateralisation.

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Cash Collateral
The most common form of CE in Indian securitisation transactions is cash collateral provided by
the originator. The cash collateral is typically available to cover any shortfalls in amounts due to
PTC investors on account of defaulted loans. The cash collateral is often in the form of a fixed
deposit account in the name of the originator with a lien marked to the trustee of the transaction
(as detailed in the Counterparty Risk section above). The trustee typically has the sole
operational and withdrawal rights on the bank account. Once the cash collateral has been utilised
for the first time, any excess collections (after payment towards expenses and PTCs) are usually
used to top up and restore the cash collateral to its initial level. The cash collateral is often also
split into two facilities - a first loss facility used as the first level of credit protection and a second
loss facility used only once the first loss piece has been fully exhausted. Transactions with only
one first loss facility are also commonly practiced.

Subordination
In a simple two-class senior-subordinated (senior/sub) structure, the subordinated class provides
CE to the senior class by having all losses on the asset pool allocated to it first until its balance
is reduced to zero (assuming that the proceeds of the subordinated note were applied to
purchase performing receivables). Typically, interest and principal due to the senior tranche is
paid first, post which the interest and principal due to the subordinated tranche is paid out. Ind-
Ra models the transaction waterfall as per the transaction documents.

Guarantees and Corporate Undertakings

The CE may be provided in the form of a guarantee or corporate undertaking provided by the
originator or a third party. In such cases, Ind-Ra assesses the credit rating of the guarantor or
undertaking provider (as detailed in the Counterparty Risk section above). Ind-Ra analysts
evaluate the guarantee (or undertaking) documents as well as the legal opinion provided by the
transaction legal counsel to determine the strength of the guarantee with respect to whether the
guarantee is unconditional and irrevocable as well as the coverage of the guarantee with regards
to the amount payable, the time taken for payment to be made upon invocation and the
availability of the guarantee for the whole tenor of the transaction.

Excess Spread
In a par structure, excess spread is the difference between the yield received from the securitised
pool and the yield paid to the PTC investor. In each payout period, excess spread can act as a
first line of protection against delinquencies and therefore used to meet temporary shortfalls in
the amount due to PTC investors.

Ind-Ra assesses the extent to which excess spread is available to PTC investors as per the
transaction waterfall. In some transactions, the excess spread is effectively released to the
originator on each payment date on a “use it or lose it” basis and therefore is not available to
cover future defaults or losses. Alternatively, the entire excess spread is available in transactions
where the waterfall stipulates that the excess spread will be ‘trapped’ in the collection and payout
account.

In certain transactions, on the basis of certain triggers, the excess spread may be trapped in a
reserve account, and shall not flow back to the originator at the bottom of the payment waterfall.
In such cases, the excess spread shall be available for curing delinquencies during the
subsequent payment periods as well.

As mentioned in the Par versus Premium Structures section above, in premium structures, there
is no excess spread as the excess interest is effectively monetised at the onset of the transaction
when determining the PTC principal balance.

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Overcollateralisation of Receivables
In par structures overcollateralisation exists when a specified percentage of receivables in each
period is allocated to be used as protection against any PTC investor shortfalls. Therefore, the
scheduled payouts to the PTC investor every month benefit from the excess pool cash flows
(overcollateralisation of monthly receivables).

In Ind-Ra view, overcollateralisation of monthly receivables is a weaker form of CE compared to

cash collateral as the support provided by overcollateralisation is dependent on asset
performance, prepayments and collection efficiencies. To reflect this credit risk and liquidity risk,
as part of its analysis, Ind-Ra applies its stresses to all of the loan assets in the transaction,
including the specified percentage of loans that are providing the overcollateralisation.

Legal Analysis
Ind-Ra reviews the transaction documentation to understand whether the terms and legal
structure of the transaction conform to information previously received. The key transaction
documents prepared by the transaction counsel in a typical Indian securitisation transaction are
listed in Appendix 3.

Legal Opinions for PTC Transactions

PTC Securitisations
These transactions are structured to isolate the underlying pool of loan receivables from the
bankruptcy and insolvency risk of the other parties involved in the transaction. This is
accomplished by transferring/assigning the loans to a bankruptcy-remote SPE also referred
to as a trust, which issues PTCs.

Ind-Ra relies, in its credit analysis, on legal and/or tax opinions provided by a reputable
transaction counsel. Although some legal issues that are difficult to analyse will always remain,
such as the risk of a change in the legal or tax regime and possibility of fraud, which are beyond
the scope of a rating. Given the legal framework governing securitisation in India, Ind-Ra expects
the legal opinions to cover the following key legal issues -

1. Incorporation of the Trust and the Capacity of the Parties Involved

The trust has been validly constituted under the trust deed for the purpose of the specific
securitisation and all parties to the transaction have the power, capacity and authority to
enter into the transaction agreements and to exercise their rights and perform their
obligations as per the documentation.

2. Enforceability of Transaction Documents

The transaction documents have been duly executed and constitute legal, valid, binding
obligations, which are enforceable against the trust and all other parties to the transaction.
Furthermore, the legal opinion is expected to comment that the underlying loan agreements
do not provide for any restriction on the transfer/assignment of the assets by the seller.

3. Segregation of Assets from the Seller

Assets are assigned to a SPE, such that (a) all right, title, interest and benefits of the seller
in the assets are transferred to the trustee and (b) none of the seller’s creditors shall have
any right in or to the assets, including in the case of liquidation or winding up of the seller.
As such, the PTC investors will have no recourse to the seller and the creditors of the seller
will not be able to overturn the sale and claw back any loan receivables, claiming they form
part of the bankruptcy estate of the seller.

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In ABS transactions backed by vehicle financing loans, it is important to note that Indian vehicle
registration rules impact the actual transfer of the asset collateral. The underlying security
Impact of Vehicle
Registration Rules on interest is not directly held by the trustee but is instead held by the seller in its capacity as security
Auto Loan Securitisations trustee for the beneficial interest of the trustee and PTC investors.
The Motor Vehicles Act 1998
governs the security interest for 4. Bankruptcy Remoteness of CE and LF from the Originator
vehicles under which the secured In most securitisation transactions, the CE and LF are usually provided in the form of a fixed
party’s interest is evidenced by deposit in a bank account. For these to be bankruptcy remote from the originator, both can
notation of a lender’s name on the be deposited in the name of the trust in an account owned by the trustee. In some cases,
registration certificate issued for the the legal opinion further specifies that any earned deposit interest can only flow back to the
vehicle. Given the time and cost
originator along with CE at the end of the transaction.
involved in changing the lender’s
name from the seller to the trustee In some transactions, however, the CE and LF are held as fixed deposits in the name of the
and that the originator/seller
originator with a lien marked to the trustee. In Ind-Ra view, this introduces counterparty risk
continues to act as the servicer for
as the fixed deposits are not bankruptcy remote and, in the event of a winding up of the
the loans, the transaction
originator, the trustee may be in the position of a secured creditor. To mitigate this risk,
documentation for a securitisation
transaction documents usually include a rating trigger stating that the fixed deposits are held
states that the underlying security
continues to be held by the seller but in the name of the originator only while the originator is highly rated (see Counterparty Risks
for the benefit of the trustee and PTC section).
investors.
A less common alternative approach to address the bankruptcy-remoteness risk is when a
tripartite agreement is signed between the trustee, account bank and originator stating that
the operational control rights of the fixed deposit clearly remain with the trustee, who has the
sole right to choose when to break the fixed deposit as and when there is a shortfall in the
PTC investor payout and the account bank acknowledges this arrangement.

The agency expects the legal counsel to opine on the bankruptcy remoteness of CE and LF
from the originator.

5. Compliance with Governing Laws, Securitisation Regulations and Taxation

The transaction is not in contravention of any of the existing laws, regulations (including all
applicable RBI and SEBI regulations) and the transaction documents are legal, valid, binding
and enforceable against the originator and all other parties to the transaction. The
transaction complies with the Reserve Bank of India (RBI) (Securitisation of Standard
Assets) Directions, 2021, including any subsequent revisions/amendments and that the
transaction documents have been duly stamped as per the stamp laws applicable in the
place of execution.

As part of its cash flow analysis, Ind-Ra does not take into account any income taxes that
may be imposed on the trust, as these income taxes, if any, are assumed to be borne by
PTC investors. It should be noted that Ind-Ra does not provide legal and/or tax advice or
confirm that the legal and/or tax opinions or any other transaction documents or any
transaction structures are sufficient for any purpose.

Rating Sensitivity Analysis

This section provides an insight into the model-implied sensitivities of the transaction when the
base case assumptions with respect to one or more variables are changed, while holding others
equal. The results below should only be considered as one of the many potential outcomes, given
that the transaction is dynamically exposed to multiple risk factors.

Rating Sensitivity to Defaults

The rating migration that will occur if the base case default rate of each loan is increased by a
relative amount is demonstrated in the Rating Sensitivity to Default Rate table. For example, if
the actual default rate increases (worsens) by 20% from the base case default expectation, the
rating of the transaction may be downgraded to ‘IND AA+(SO)’.

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Figure 11
Illustration of Rating Sensitivity to Default Rate
Rating
Original rating IND AAA(SO)
Base case increase by 10% IND AAA(SO)
Base case increase by 20% IND AA+(SO)
Source: Ind-Ra

Rating Sensitivity to Recovery Rates

The rating migration that will occur if the base case recovery rate of each loan is decreased by a
relative amount is demonstrated in the Rating Sensitivity to Recovery table. For example, if the
base case recovery rate decreases (worsens) by 20%, the rating of the transaction may be
downgraded to ‘IND AA+(SO)’.

Figure 12
Illustration of Rating Sensitivity to Recovery
Rating
Original rating IND AAA(SO)
Base case decrease by 10% IND AAA(SO)
Base case decrease by 20% IND AA+(SO)
Source: Ind-Ra

Rating Sensitivity to Shifts in Multiple Factors

The Rating Sensitivity to Multiple Factors table summarises the rating sensitivity attributed to
stressing default rate and recovery assumptions concurrently.

Figure 13
Illustration of Rating Sensitivity to Multiple Factors (Default Rate &
Recovery)
Default rate
Recovery rate Base case Base case + 10% Base case + 20%
Base case IND AAA(SO) IND AAA(SO) IND AA+(SO)
Base case – 10% IND AAA(SO) IND AA+(SO) IND AA(SO)
Base case – 20% IND AA+(SO) IND AA(SO) IND AA−(SO)
Source: Ind-Ra

Performance Analytics
Objective
Ind-Ra monitors transaction performance to determine whether base case assumptions, ratings
of securitisation exposures and Rating Outlooks remain appropriate in the agency’s opinion.
Specifically, Ind-Ra reviews whether the base-case assumptions remain appropriate in light of
reported performance, as well as the agency’s forward-looking expectations for the sector and
the country.

Executed Documentation
Ind-Ra often assigns provisional ratings prior to the transaction closing date. Provisional ratings
indicate that the transaction can be assigned a final rating subject to the receipt of executed
documentation (transaction documentation and legal opinions) conforming to information already
received. Ind-Ra assigns final ratings upon receipt of executed documentation, which the agency
expects to receive within 90 days of the transaction closing date. The final rating, upon receipt of
executed documents consistent with the draft documents, shall be assigned within 90 days from
the date of issuance of the instrument. The provisional rating may be extended by another 90
days, subject to the agency’s policy, if the execution of documents is pending at that time. If, at
this point, Ind-Ra has not received the executed documentation, it will communicate to the trustee
(with a notification to the arranger) to bring the matter to their attention, thereby providing the
trustee with an opportunity to inform investors. If, Ind-Ra is still not in receipt of the executed
transaction documentation, it will consider withdrawing the provisional ratings of the transaction.

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Review Process
Ind-Ra will initiate surveillance only once final ratings have been assigned to a transaction. Clear
and timely reporting is essential in assessing current performance and forming an accurate credit
view.

The report from the servicer is expected to provide the following information with respect to
collections from the pool contracts during the previous month:

• billed amount to the borrowers;

• actual collections from borrowers towards this billed amount during the month;
• the amount and number of contracts of prepayments/advance payments from the borrowers;
• ageing analysis of overdues;
• actual payments made to the investors;
• any prepayments from borrowers or foreclosures (number of contracts and amounts
obtained therefrom);
• revised cash flow schedule; and
• loan level information
On each payout date, Ind-Ra will review the transaction-specific data. The performance levels
will be compared to: (i) Ind-Ra transaction-specific base case expectations; (ii) Ind-Ra defined
and transaction defined performance triggers; and (iii) previous periods in order to identify
inconsistencies or trends.

Rating surveillance committees are convened in the following circumstances: (i) for a review at
least once every 12 months; (ii) following the breach of a performance trigger or identification of
negative or positive performance trends; (iii) following a rating change of a material transaction
counterparty; (iv) a material adverse event in the economy, geography or sector, (v) request for
reset of CE in accordance with the RBI guidelines

Review Methodology
The methodology for surveillance is consistent with Ind-Ra initial rating approach, where
collateral performance and structural changes, if any, are reviewed prior to the cash flow analysis.
The analysis focuses on the levels of enhancement available in the transaction and whether,
under stressed conditions, the transaction can withstand a level of losses commensurate with
the risk associated with a particular rating category.

Over time, performance may trend positively or negatively away from historical levels. If the
performance of a transaction’s collateral begins to deviate significantly from the base case
assumptions, Ind-Ra will conduct an in-depth review of the portfolio. This may result in the
determination of new base case assumptions, which could, in turn, have an effect on a
transaction’s ratings.

A cash flow analysis will be conducted for the annual review of existing transactions in cases of
a deviation of asset performance or a material change to the transaction structure. In situations
where the main purpose of modelling would be to assess the effect of rising CE or better-than-
expected performance for instruments that are already at their highest achievable rating, or
capped, and where other variables are in line with expectations, a cash flow analysis will be
considered unnecessary and no model maybe used.

Auditor’s Reports
In some securitisation transactions, Ind-Ra has noted that trustees appoint a due diligence
auditor on an annual basis to audit the records of the servicer and the details of the monthly
report. Typically, the role of the third-party due diligence auditor is to independently and
objectively audit and verify the information presented by the servicer. The due diligence auditor’s
report is presented to the trustee/investors with a copy provided to Ind-Ra for the agency’s
review.

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Appendix 1: Overview of Indian Securitisation Transactions
For the purposes of this report, Ind-Ra has classified the loans securitised in transactions into
the following product types:

• vehicle financing loans for passenger cars, two wheelers, three wheelers, tractors, utility
vehicles, and light, medium and heavy commercial vehicles;
• loans for construction and agricultural equipment;
• unsecured personal and consumer durable loans;
• unsecured business loans and loan against property or secured business loans;
• home loans;
• microfinance loans;
• gold loans
Figure 14

Structure Diagram

PTC Investors Liability Analysis

PTC PTC PTC Issuance Transaction &

Payouts Issuance Proceeds Legal Structure
Credit Enhancement
Provider
Trust
Liquidity Facility
Provider
Periodic Assignment Purchase Counterparty Risks
Collections of Loans Consideration

Originator/Servicer

Loan
Loan Asset Analysis
Repayment

Underlying Borrowers

Source: Ind-Ra

Indian securitisation transactions are structured by a transfer of a specific pool of loans from the
seller/originator to a SPE/trust. The trust then issues PTCs to investors and transfers the
proceeds to the originator by way of a purchase consideration. The future cash flows from the
securitised pool are used to pay expenses and the scheduled interest and principal payouts to
the PTC investors.

The scheduled interest and principal payouts to the PTC investors are detailed in the transaction
documentation at the transaction closing date. The scheduled principal PTC payout is
recalculated one month in advance given the occurrence of principal prepayments. The
recalculation is therefore based on the scheduled principal of the remaining underlying loans in
the securitised pool. The scheduled interest PTC payout is dependent on the opening PTC
principal outstanding at the start of the particular payout period and the coupon rate of the PTCs.

Ind-Ra’s rating of the PTCs addresses the timely payment to PTC investor as per the payment
waterfall by the scheduled/legal maturity date in accordance with the transaction documentation.

Suffix of (SO) is included to denote that the issuance is a structured obligation. Ind-Ra’s
Complexity Indicator for Indian securitisation transactions is “High” as the relationship between
the numerous interdependent risk factors and the intrinsic return characteristics is highly
involved, requiring forward-looking analysis and projections. For further details on Ind-Ra’s
Complexity Indicators for Indian Market Instruments, please refer to
www.indiaratings.co.in/complexity-indicators

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Appendix 2: Other Structural Features in Indian ABS/RMBS
Clean-Up Call Options
In most transactions, the originator/seller has a clean-up call option to repurchase residual loan
assets if, in aggregate, they form less than 10% of the original value of the underlying exposures
or securitised pool balance. Typically, the right to exercise this option is solely with the
originator/seller. If the clean-up call option is exercised, PTC holders expect to receive all residual
amounts due to them in accordance with the transaction documentation. Clean-up call options,
if any, should not be structured to avoid allocating losses to CEs or positions held by investors
or otherwise structured to provide CEs to the transaction.

Transaction-Specific Performance Triggers

Some transactions incorporate specific performance triggers; for example, a maximum threshold
of delinquency and defaults or a minimum threshold on the cumulative collection efficiency.
These triggers are included to address the PTC investor’s concern that a breach in a performance
trigger could be an indication that the servicer is not performing as well as initially envisaged and
the trustee should therefore take corrective action by replacing the servicer. While transactions
incorporate servicer replacement events, these replacement provisions largely remain untested
to date.

Interest Rate and Basis Risk

The vast majority of ABS transactions have no interest rate risk as the underlying securitised
loans and the PTCs issued both carry a fixed interest rate (natural hedge). A majority of RMBS
transactions are structured to mitigate the risk of interest rate movements. Ind-Ra will test for any
residual interest rate exposure by performing an interest rate stress analysis using upward,
downward and stable interest rate scenarios.

In instances where the securitised pool carries a fixed interest rate but the PTC liabilities are
floating interest rate, the transaction may seek to hedge the interest-rate risk or basis risk by
swapping: (i) the securitised pool’s fixed rate to floating; or (ii) the PTCs’ floating-rate coupon to
a fixed rate. In the former, the risk of over- or under-hedging is apparent as the loans in the
securitised pool could amortise faster than originally forecasted due to the acceleration of
prepayments or defaults. In the latter, if there is an early amortisation event of the PTCs, this
could affect the hedge’s coverage as the transaction PTCs’ liability amortisation is accelerated.
In addition to evaluating the financial mechanics of the hedge instruments, Ind-Ra will examine
the payment waterfalls and counterparties involved.

For transactions that do not incorporate interest-rate risk hedging mechanisms, Ind-Ra will
evaluate available structural features that aim to mitigate any interest rate or basis mismatches.
Ind-Ra will apply additional stresses to account for unhedged interest-rate risks in the
transactions. In addition, ratings within the scope of these criteria are subject to the following
specific limitations: to the extent the PTC coupon of a rated class is subject to a net weighted
average coupon, the ratings only address the likelihood of the PTC holder’s receipt of interest up
to the cap rate. Also, any risk of interest reduction due to loan modifications will be accounted for
in Ind-Ra’s cashflow analysis.

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Appendix 3: Transaction Documents
For PTC structures, the documents prepared by the transaction legal counsel typically include
the following.

• Trust Deed – The document settles the trust and also lays down the powers and duties of
the trustees to manage the trust property and make payments to the PTC holders. The trust
deed can also provide for certain important provisions in relation to the PTC holders and the
waterfall mechanism
• Assignment Agreement/Deed of Assignment – The conveyance document under which
the underlying pool of loans is sold to the trustee. The document also incorporates the
representations, warranties and undertakings of the seller
• Collection and Servicing Agreement – The trustee appoints the collection and servicing
agent as its agent under this document and sets out the powers and duties of the collection
agent in collecting the receivables, enforcing security and making payments to the
trust account
• CE/Liquidity Support Agreements (as Applicable) – The documents under which the
seller or third party provides CE and liquidity support. These can be in the form of
undertakings, agreements or corporate guarantee and will set out the manner and the
circumstances in which the amounts can be drawn upon by the trustee
• Power of Attorney Issued by the Seller in Favour of the Trust (if Appropriate) – Under
this document, the seller authorises the trustee to take all actions in relation to collecting and
enforcing payment of the receivables
• Power of Attorney Issued by the Trust in Favour of the Collection and Servicing Agent
(if Appropriate) – Under this document, the trustee authorises the collection and servicing
agent to take all actions to recover the receivables as its agent

Additionally, the prospectus or Information Memorandum issued by the arranger/trustee

describes the underlying pool of loans and the nature of the securities issued. The terms and
conditions of the PTCs as well as the procedure for application are also provided.

Ind-Ra takes note of amendments in the transaction documents made by the transacting parties
during the tenure of the transaction and takes appropriate rating actions. It should be noted that
as Ind-Ra is not a party to any of the legal documents of a transaction, it does not provide consent
to or approval of amendments to the transaction documents or structure. Ind-Ra is not
responsible for the structuring of transactions - which remains the sole preserve of transaction
parties.

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Appendix 4: Information Expected from Originators
To analyse a securitised loan pool, Ind-Ra expects to receive details of the underwriting and
servicing functions as well as stratification data for the securitised pool and portfolio performance
history. Ind-Ra expects performance history for the relevant asset class for at least three or more
years or for one complete loan cycle, whichever is higher.

Securitised Pool Stratification Data

• Total number of accounts and current outstanding balance
• Delinquency status of all borrowers, delinquency string of all borrowers in the recent past.
• Account level information on various pool characteristics, including loan-to-value, internal
rate of return (IRR), original and balance tenor, geographic location, credit score and
borrower employment/business profile
• Information on the underlying asset, including type/sub-type of asset class, value of the
underlying collateral. Asset class specific characteristics such as vehicle type/make, end-
use of collateral – self-occupied/commercial/rented-out property, latest valuations

Portfolio Historical Data

• Static pool delinquencies and defaults
• Static pool recoveries
• Static pool monthly prepayments
• Dynamic delinquencies showing periodic aging by delinquency bucket
• Delinquency levels on a dynamic basis for different borrower segments
• Collection performance (on a cumulative, current and overdue basis)

Portfolio data is expected to be provided separately for different asset classes securitised by the
originator. The historical data is expected to cover at least one economic cycle.

Also, as elaborated in the Originator and Servicer Review section, Ind-Ra expects originators to
provide information and documentation on the origination, underwriting, collections, recovery,
risk management practices and staffing/technology resources of the originators.

Ind-Ra may seek additional corporate and financial information about the originator in case of
transactions, where the agency does not have a public rating on the originator/servicer, to assess
the going-concern nature of the counterparty.

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Appendix 5: Simulation of the Gross Default Rates
The static pools provided by originators typically show the outstanding loan principal in either
90+ or 180+ days past due (dpd) in each payout period. As recoveries are incorporated into these
static pools, an approximate gross default rate needs to be determined.

For unsecured asset classes such as personal loans, microfinance loans and consumer durable
loans, the recovery potential is often either minimal or the net default rate does not decline at the
tail end of the loan tenor. Ind-Ra therefore considers the peak of the net default rate from the
static pools and assumes zero recoveries. However, in certain cases where sufficient track
record of recoveries has been established by the originator, Ind-Ra may assume appropriately
stressed levels of recoveries.

For asset classes such as commercial vehicles, commercial equipment and consumer autos
where recoveries have historically ranged from 20% to 80%, Ind-Ra adjusts the base-case net
default rate to simulate a base-case gross default rate.

Specifically, assume an ABS transaction backed by new commercial vehicles where the tenor of
the loan pool is 51 months and where the base-case peak 90+ dpd observed is 5.9% of the initial
pool principal as shown below.

Figure 15

Net Default Curve – Static Pools (with benefit of recovery)

(%)
7
6
5
4
3
2
1
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
(Months from origination)
Source: Ind-Ra

• The base-case net default rate curve shown above is a function of the actual gross default
rates, recovery rates and the time to recovery
• Based on the information provided by the originator, the following variables can be
estimated:
o The recovery rate for the originator’s new commercial vehicle portfolio for defaulted
loans ranges from 60 to 80%
o Time to recovery varies from 12 to 18 months
o The gross default timeline peaks at the 37th month
Figure 16

Simulated Cumulative Gross Default Curve

Net default curve – model (with benefit of recovery)
Cumulative recoveries – model
(%)
Cumulative gross defaults – model
8
7
6
5
4
3
2
1
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51
(Months from origination)
Source: Ind-Ra

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• Ind-Ra approximates the gross default curve by assuming an initial peak gross default level
and the gross default timeline
• Ind-Ra then performs a number of iterations on the gross default curve to match the
simulated net default rate with the actual one in the chart above. The iterations are performed
by varying the recovery rate, time to recovery and the cumulative gross default timelines
• The peak of the cumulative gross default curve is then considered as the base-case gross
default rate in Ind-Ra cash flow model. As shown in the chart above, the peak of the
estimated gross default rate is 7.1%, which on account of recoveries shows a peak net
default rate of 5.9%
• The recovery rate assumed on the defaulted loans is based on the rating level as well as the
historical recovery range considered in the simulation.

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Appendix 6: Empirical Data Study
Ind-Ra conducted an empirical study on the performance of the securitisation transactions rated
by the agency from January 2007 to December 2020 to validate the default and prepayment
stresses against the historical worst-case observations.

Default Rates
Ind-Ra studied the default statistics of over 400 rated ABS/RMBS issuances, seasoned by more
than 12 months, across 38 originators for various asset classes and vintages to ascertain the
maximum and average, default levels as a percentage of initial principal outstanding. Figure 17
shows the performance of the transactions till December 2020 collections.

Figure 17
Default Statistics
Transaction Delinquency
Asset class No. of pools Average (%)a Max (%)a Max/average(x)
Commercial vehicle-90+ DPD 237 3.46 6.32 1.8
RMBS-90+ DPD 45 2.84 3.61 1.3
Tractor-90+ DPD 37 6.13 11.32 1.9
Tractor-180+ DPD 37 2.59 4.63 1.8
Microfinance-0+DPD 37 3.15 7.17 2.3
a
Value mentioned is average of the statistic among the originators within the asset class.
Source: Ind-Ra analysis

It may be noted from the aforementioned analysis that irrespective of the asset class, the ratio of
the maximum default to average default rate remained within a range of 1.3x to 1.9x except for
Microfinance-0+dpd, which experienced elevated volatility during the pandemic in 2020. The
difference in the magnitude of the defaults, gets addressed by the agency’s base case default
analysis of the assigned pool from a particular originator. The volatility in the default rate that is
measured as “Max/Average” in Figure 17 is addressed by the default stress multiple that is
applied on the default rate.

These figures are derived from analysis of securitised pools, which are generally cherry-picked
by the investors as per their risk appetite, and are generally expected to perform relatively better
as compared to the overall portfolio of the originator. To address this, Ind-Ra also studied non-
performing asset (NPA) trends in new private sector banks to estimate peak default rates in a
period of economic stress.

A lender’s GNPA ratio (gross non-performing loans/gross advances) is a dynamic measure as

the denominator includes newly originated loans that may get delinquent with a time lag. Thus
the agency considers lagged GNPA ratio that considers the gross advances of the previous year.
Figure 18 presents the ratios for new private sector banks:

Figure 18

Gross NPAs/Lagged Total Advances for Private Sector Banks

(%) GNPA 1 year Lagged GNPA
10
9
8
7
6
5
4
3
2
1
0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
(Year)
Source: RBI Database on Indian Economy, Ind-Ra

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It may be noted that the ratio of (max/average) for this dataset is 1.93x, which is in a similar range
compared to the Ind-Ra rated transactions.

Prepayment Rates
Ind-Ra analysed the monthly prepayment statistics of over 400 rated transactions seasoned for
a minimum of 12 months. The below tables show the prepayment statistics of the transactions
from January 2007 to December 2020.

Figure 19
Prepayment Statistics
Transaction Monthly Prepayments
Asset class No. of pools Average (%)a Max (%)a Max/average (x)
Commercial vehicles 237 3.48 7.10 2.0
Tractor 37 2.04 3.69 1.8
Microfinance 37 5.22 8.18 1.6
HL, RMBS & LAP 45 2.57 3.25 1.3
a
Value mentioned is average of the statistic among the originators within the asset class.
Source: Ind-Ra analysis

The monthly prepayment rate for loans in securitised pools is volatile with a maximum/average
of around 2x or lesser. This is consistent with Ind-Ra’s standard prepayment rate multiple for
Indian securitisation transactions at the ‘IND AAA(SO)’ rating level of between 2.0x and 2.5x.

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In issuing and maintaining its ratings, India Ratings and Research (Ind-Ra) relies on factual information it receives from issuers and underwriters
and from other sources Ind-Ra believes to be credible. Ind-Ra conducts a reasonable investigation of the factual information relied upon by it in
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sources are available for a given security or in a given jurisdiction. The manner of Ind-Ra's factual investigation and the scope of the third-party
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ensure that all of the information Ind-Ra relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers
are responsible for the accuracy of the information they provide to Ind-Ra and to the market in offering documents and other reports. In issuing
its ratings Ind-Ra must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with r espect
to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by
their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions
that were not anticipated at the time a rating was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind. An Ind-Ra rating is an opinion as to the
creditworthiness of a security. This opinion is based on established criteria and methodologies that Ind-Ra is continuously evaluating and
updating. Therefore, ratings are the collective work product of Ind-Ra and no individual, or group of individuals, is solely responsible for a rating.
The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Ind-Ra is not engaged
in the offer or sale of any security. All Ind-Ra reports have shared authorship. Individuals identified in a Ind-Ra report were involved in, but are
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connection with the sale of the securities. Ratings may be changed or withdrawn at anytime for any reason in the sole discretion of Ind-Ra. Ind-
Ra does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment
on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made
in respect to any security. Ind-Ra receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such
fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Ind-Ra will rate all or a
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are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination
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