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The economic slowdown caused by the resurgence of Covid-19 in India will impact the performance of asset backed securities (ABS) such as commercial vehicle loans, among others, said Moody's Investors Service.

"Slowing economic activity in India due to the second wave (of Covid-19) will constrain commercial vehicle owners' capacity to pay auto loans. As a result, commercial vehicle loan delinquencies will increase in India and collection rates will remain below the March levels over the next three to six months," said Dipanshu Rustagi, Assistant Vice President and Analyst at Moody's.

Sluggish economic activity will dampen demand for goods transportation and lower freight rates. This will reduce commercial vehicle operators' incomes, and therefore, their ability to repay auto loans, Moody's said.

According to Moody's, rising fuel costs due to depreciation of rupee and state and Central fuel tax changes have hiked commercial vehicle operators' costs and will further constrain their loan-repayment ability.

Cash reserves, excess spread and transaction structures will mitigate the risks, it said.

The Indian ABS that Moody's rates benefit from non-amortising cash reserves and substantial excess spread, providing liquidity and buffers against losses.

Most deals also have timely interest and ultimate principal structures, which provide additional protection against liquidity risks, Moody's said.