Moody's Investors Service on Thursday said that the performance and asset quality of retail loans backing Indian asset-backed securities (ABS) will improve over the next two years, despite an expected rise in non-performing loans (NPLs) due to tightened recognition criteria.

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Vincent Tordo, a Moody's Analyst said, "Although retail loans originated by non-bank financial companies (NBFCs) -- subject to the tighter criteria since 1 March 2016 -- 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." 

As on June, the NPLs as part of the stressed loans have risen by 55.38% to about $101 billion, from $65 billion in December, Reuters report showed. 

As per the new NPL guidelines,  NBFCs  are required to recognise loans that are 150 days or more in arrears as NPLs, compared to 180 days previously. These criteria will further get stricter to 120 days from March 2017 and 90 days from March 2018.

Taking into consideration with new NPL guidelines,  Moody's expects NPL ratios reported by NBFCs to rise over the next two years. However, it further expects the improving underlying performance to be reflected in lower delinquencies rates.

Further, Moody's report show-cased that Indian ABS are largely exempted from the run-up in NPLs in the Indian banking sector, because Indian ABS are exclusively backed by loans originated by NBFCs and not by banks.