Chennai, Oct 13 (IANS): The underlying performance and asset quality of retail loans backing Indian asset-backed securities (ABS) will improve over the next two years despite an expected increase in non-performing loans (NPL) due to tightened recognition norms, global credit rating agency, Moody's Investors Service said on Thursday.

"Although retail loans originated by non-bank financial companies (NBFCs) -- subject to the tighter criteria since March 1 -- account for the bulk of assets backing Indian ABS, we expect improving macroeconomic conditions and more rigorous collection processes by originators will boost their underlying performance," said Vincent Tordo, a Moody's analyst.

"In particular, we expect the performance of loans backing commercial vehicles and construction equipment -- the main assets used in Indian ABS -- to improve owing to favourable operating conditions and increased efforts by originators to prevent delinquent loans from progressing into NPLs," adds Tordo.

Moody's conclusions are contained in its just-released report 'India -- ABS: Indian ABS Performance Is Largely Immune from Bank NPL Woes'.

According to Moody's the new NPL criteria require NBFCs to recognise loans that are 150 days or more in arrears, as compared to 180 days previously.

The standard will further tighten to 120 days from March 2017 and 90 days from March 2018.

While Moody's expect NPL ratios of NBFCs to rise over the next two years owing to the new criteria; it expects the improving underlying performance to be reflected in lower delinquencies.

According to data from ICRA -- Moody's Indian affiliate -- the performance of loans on new commercial vehicles have improved markedly over the past six months, reflecting overall improving operating conditions in the country.

The performance of loans on used commercial vehicles, commercial equipment and tractors was mostly stable.

Moody's said that the Indian ABS are largely immune from the run-up in NPLs in the Indian banking sector.

This was due to the fact that Indian ABS are exclusively backed by loans originated by NBFCs and not by banks.

In addition, the vast majority of assets backing ABS are retail or small loans, while the increase in bank NPLs has been largely the result of poor performing corporate loans to borrowers in heavy industries, Moody's said.

Banks' retail loans have, in fact, seen their performance improve over the past five years.