A laborer works on a lathe machine in a workshop in Mayapuri Industrial Area in New Delhi. (Photographer: Sanjit Das/Bloomberg)

Moody’s Warns Of Higher SME LAP Delinquencies On Rising Rates

Interest costs on loans against property are set to rise due to the hardening rates. And that will adversely affect small businesses, which are already reeling under the impact of note ban and the goods and services tax.

That’s according to a latest note by Moody’s Investors Service. “Introduction of the goods and services tax in July 2017 and demonetisation have also placed stress on the small and medium enterprises sector, which with the rising interest rates will exacerbate,” it said in a statement today. “Rising interest rates, in addition to the muted operating environment for small businesses in India, will lead to an increase in delinquencies on LAP (loans against property) extended to SMEs.”

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Hike in interest rates by the Reserve Bank of India, and hardening of yields since late-2017 have led to an increase in the cost of borrowing for non-banking lenders. This will prompt them to hike the rates at which loans against property are extended to small businesses, Moody’s said.

“We consider that the expected rise in interest rates for LAP (loans against property) will reduce refinancing options for small business owners, adversely affecting existing borrowers.” Moody’s Assistant Vice-President and Analyst Dipanshu Rustagi said in the report. Higher interest rates will lead to an increase in loan repayment for SME borrowers who cannot extend loan terms, he said.

Loans against property is one of the most sought-after routes by small business promoters for short term finance as they can raise money through pledging of property which serves as a collateral for lenders. In the recent past, there have been multiple warnings on LAP portfolios issued by analysts, especially in wake of an extra focus by lenders on the retail segment considered resilient.

Moody’s today said it expects delinquencies on LAP portfolios, but added this will not pinch hard as the loans have low loan-to-value ratios and are “secured” with properties as collaterals. It added that legislative amendments in 2016, which lets the non-banking finance companies recover money under the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act will also help restrict losses.

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