SME loan delinquencies will continue to rise for NBFCs: Moody’s

Rising interest rates, increasing costs amid high inflation and a muted operation environment for small businesses have weighed on SME borrowers’ abilities to meet debt repayments over the past year, Moody’s Investors Service said in a report.

“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,” the Moody’s said, adding that it expects loan delinquency rates for LAP given to SMEs to continue to rise.

Since May 2022, the Reserve Bank of India (RBI) has increased its policy repo rate by 2.5 percentage points to 6.5 per cent. In its April monetary policy meeting, the RBI kept the repo rate unchanged to assess the cumulative effect of past rate hikes.

The report said while the Reserve Bank of India has paused its rate rise cycle in April, rate hikes over the past year have increased funding costs for NBFCs.

As their funding costs have risen, 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. The rate increases 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 said.

Moody’s said India’s economy will remain vulnerable to bouts of heightened financial market volatility while interest rates remain restrictive in advanced economies, which will add to the risk of LAP delinquencies. The report further said even if the RBI were to keep rates on hold from here, the repayment amounts will weigh on SME borrowers’ capacities to repay debt.

It, however, said despite rising delinquencies, LAP ABS are well protected, because of the deals’ structural protections.