Last Updated: April 17, 2023, 14:13 IST
The rate of interest hikes over the previous yr have elevated funding prices for non-banking finance firms (NBFCs).
The price will increase over the previous yr have decreased the probability that LAP debtors will be capable to refinance their debt on extra reasonably priced phrases if they’ll now not meet compensation quantities, says Moody’s
Moody’s Investors Service on Monday mentioned larger rates of interest have elevated compensation quantities and restricted refinancing choices for SME debtors who’ve availed loans in opposition to property, heightening default threat for these loans.
“Even if the RBI had been to maintain charges on maintain from right here, the compensation quantities will weigh on SME debtors’ capacities to repay debt. Furthermore, the speed will increase over the previous yr have decreased the probability that LAP debtors will be capable to refinance their debt on extra reasonably priced phrases if they’ll now not meet compensation quantities,” Moody’s said.
LAP refers to loans against property.
It said the interest rate hikes over the past year have increased funding costs for non-banking finance companies (NBFCs).
With rising funding cost, the NBFCs have increased interest rates for loans against property (LAP) to small and medium-size enterprise (SME) borrowers, which is heightening repayment and refinancing risks for these loans.
This scenario is credit score adverse for Indian asset-backed securities (ABS) backed by mortgage in opposition to property (LAP), Moody’s mentioned.
“Higher interest rates in India have increased repayment amounts and limited refinancing options for SME borrowers with LAP (loans secured by mortgages over residential or commercial real estate), heightening the risk of delinquencies and defaults,” Moody’s mentioned.
Since May final yr, the RBI has hiked key coverage charges six occasions by a complete of two.5 proportion factors to six.5 per cent to manage inflation. Earlier this month, the RBI paused the speed hike cycle and maintained a establishment.
Indian 10-year authorities bond yields and the Marginal Cost of Fund based mostly Lending Rate (MCLR), which is the benchmark price that banks principally use to set lending charges for NBFCs, have elevated because the RBI’s repo price has risen.
The US-based ranking company additionally mentioned that the tempo of property worth development has slowed in main Indian cities on account of price rises over the previous yr.
Slower property worth development has decreased restoration prospects for defaulted LAP, which is adverse for Indian ABS backed by these loans. Additionally, slower property worth development has eroded lenders’ willingness to refinance LAP, Moody’s mentioned.
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