Higher interest rates increase repayment amounts, limiting refinance options for SME borrowers with loans against property: Moody’s

Moody’s Investors Service on Monday said higher interest rates have increased repayment amounts and limited refinancing options for SME borrowers taking loans against property, increasing the default risk for these loans.

“Even if the RBI keeps rates on hold here, the repayment amount will weigh on the loan repayment ability of SME borrowers. Moreover, last year’s rate hike has reduced the chances that LAP borrowers will be able to refinance their loans if They can no longer meet the repayment amount, so take loans at more affordable terms,” ​​Moody’s said.

LAP stands for Loan Against Property.

It said funding costs for non-banking financial companies (NBFCs) have increased due to the rise in interest rates last year.

With rising funding costs, NBFCs have increased interest rates for loans against property (LAP) for small and medium-sized enterprise (SME) borrowers, increasing the repayment and refinancing risks of these loans.

This situation is negative for Indian asset-backed securities (ABS) backed by loan against asset (LAP), Moody’s said.

“High interest rates in India have increased repayment amounts and limited refinance options for SME borrowers with LAPs (loans secured by mortgage on residential or commercial real estate), leading to increased risk of delinquencies and defaults,” Moody’s said. Is.”

Since May last year, the RBI has raised key policy rates six times by a total of 2.5 percentage points to 6.5 per cent to control inflation. Earlier this month, the RBI halted the rate hike cycle and maintained status quo.

Indian 10-year government bond yields and the marginal cost of funds based lending rate (MCLR), which is the benchmark rate that banks use to set lending rates for most NBFCs, have increased due to RBI increasing the repo rate. .

The US-based rating agency also said that the pace of property price growth in major Indian cities has slowed as a result of the rate hike last year.

Slow asset price growth has reduced recovery prospects for defaulted LAPs, which is a negative for Indian ABS backed by these loans. Additionally, slow asset price growth has reduced lenders’ willingness to refinance LAPs, Moody’s said.