Moody’s Investors Service said on Monday that higher interest rates have increased payment amounts and limited refinancing options for SME borrowers who have used loans against property, increasing the risk of default on these loans.
“Even if the RBI were to keep rates unchanged from now on, the repayment amounts will weigh on the ability of SME borrowers to repay debt. Furthermore, rate increases over the past year have reduced the likelihood that PAL borrowers can refinance their debt on more affordable terms if they can no longer meet their payment amounts,” Moody’s said.
LAP refers to loans against property.
It said increases in interest rates over the past year have increased funding costs for non-banking financial companies (NBFCs).
With the cost of financing rising, NBFCs have increased interest rates for loans against property (LAP) to small and medium enterprise (SME) borrowers, which is increasing the risks of repayment and refinancing of these loans.
This situation is credit negative for Indian asset-backed securities (ABS) backed by loans against property (LAP), Moody’s said.
“Higher interest rates in India have increased payment amounts and limited refinancing options for SME borrowers with LAPs (loans secured by mortgages on residential or commercial real estate), increasing the risk of delinquencies and defaults,” Moody’s said.
Since May last year, the RBI has raised key interest rates six times by a total of 2.5 percentage points to 6.5 per cent to control inflation. Earlier this month, the RBI stopped the rate hike cycle and maintained the status quo.
Indian 10-year government bond yields and marginal cost of funds lending rate (MCLR), which is the benchmark rate that banks primarily use to set lending rates for NBFCs, have risen as the RBI repo rate has increased.
The US-based rating agency also said the pace of property price growth has slowed in major Indian cities as a result of rate hikes over the past year.
Slower growth in property prices has reduced the recovery prospects of defaulted LAPs, which is negative for Indian ABS backed by these loans. Additionally, slower property price growth has eroded lenders’ willingness to refinance LAP, Moody’s said.