SME loan delinquencies will continue to rise despite RBI’s rate pause, says Moody’s 

SME loan delinquencies will continue to rise despite RBI’s rate pause, says Moody’s 

Higher interest rates in India have increased repayment amounts and limited refinancing options for Small & Medium Enterprises (SME) borrowers with loan against property (LAP--loans secured by mortgages over residential or commercial real estate), heightening the risk of delinquencies and defaults, Moody’s said in a report.

“This situation is credit negative for Indian Asset Backed Securities (ABS) backed by LAP,” it said.

Stating that the Reserve Bank of India (RBI) has increased its policy repo rate by 2.5 percentage points to 6.5% in a series of rate rises since May 2022 to combat inflation, Moody’s said the Indian 10-year government bond yields and the Marginal Cost of Fund based Lending Rate (MCLR), which is the benchmark rate that banks mostly use to set lending rates for NBFCs, have increased in line with the rise in repo rate.

“The higher repo rate, bond yields and MCLR have pushed up the cost of both market and bank funding for NBFCs, compressing their net interest margins and prompting them to raise rates for LAP,” it said.

LAPs securitized in India ABS have floating interest rates, so repayment amounts for these loans have increased as lenders have raised borrowing costs. Even if the RBI were to keep rates on hold from here, the repayment amounts will weigh on SME borrowers’ capacities to repay debt, the rating agency said.

Furthermore, the rate increases over the past year have reduced the likelihood that LAP borrowers will be able to refinance their debt on more affordable terms if they can no longer meet repayment amounts, it added.

Emphasising that slowing property price growth is curtailing recovery prospects, Moody’s said the pace of property price growth has slowed in major Indian cities as a result of rate rises over the past year.