Higher interest rate increases repayment amount, limits refinancing options for SME borrowers with loans against property: Moody's

Moody’s Investors Service, in a recent analysis, highlighted the consequences of higher interest rates on SME borrowers who have taken loans against property in India. The increase in repayment amounts and limited refinancing options have heightened the default risk for these borrowers.

Key Points Covered:

Challenges faced by SME borrowers with loans against property
Impact of interest rate hikes on funding costs for NBFCs
Rising interest rates for loans against property to SMEs
Credit negativity for Indian ABS backed by loans against property
Effects of RBI’s rate hikes on repayment and refinancing risks
Slowdown in property price growth and implications

Interest Rate Hikes and Impact on SME Borrowers:

According to Moody’s, the successive interest rate hikes by the RBI have increased repayment amounts for SME borrowers with loans against property. This has also limited their options for refinancing, raising the risk of delinquencies and defaults.

The heightened funding costs for NBFCs due to these rate hikes have led to increased interest rates for loans against property extended to SMEs. This, in turn, has further compounded the repayment and refinancing risks associated with such loans.

Slowdown in Property Price Growth:

As a consequence of the rate hikes, the pace of property price growth in major Indian cities has slowed down significantly. This slowdown has adversely affected the prospects of recovery for defaulted loans against property, adding a negative outlook for Indian ABS backed by such loans.

Moody’s also noted that the sluggish property price growth has diminished lenders’ willingness to refinance loans against property, leading to a more challenging environment for SME borrowers looking for viable refinancing options.

RBI’s Policy Actions and Market Response:

Since May last year, the RBI has raised key policy rates multiple times to curb inflation, resulting in a cumulative increase of 2.5 percentage points to reach 6.5 per cent. Despite this, the RBI recently opted to maintain a status quo on interest rates.

The rise in Indian 10-year government bond yields and the Marginal Cost of Fund based Lending Rate (MCLR) has been directly influenced by the RBI’s rate actions. These factors have contributed to the overall environment of higher interest rates for loans against property.

Conclusion:

Moody’s assessment underscores the challenges faced by SME borrowers in India with loans against property, brought about by interest rate hikes and their subsequent repercussions on repayment amounts and refinancing options. The slowdown in property price growth further complicates the landscape, impacting recovery prospects and lenders’ willingness to provide refinancing solutions.