Moodys red flags soaring rates on loans against property in India after GST, demonetisation setbacks

Interest costs on loan against property (LAP) are set to rise due to the hardening rates and will adversely affect small business, which are already reeling under note-ban and GST impact, warns a report. “Introduction of the goods and services tax (GST) in July 2017 and demonetisation have also placed stress on the SME (small and medium enterprises) sector, which with the rising interest rates will exacerbate,” rating agency Moody’s Investor Service said today.

Hike in interest rates by the Reserve Bank and hardening of yields since late-2017 have led to an increase in the cost of borrowing for non-banking lenders, which will prompt them to hike the rates at which LAP are extended to SMEs, it said.

“We consider that the expected rise in interest rates for LAP 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.

He further said the higher interest rates will lead to increase in loan repayment for SME borrowers who cannot extend loan terms.

It can be noted that the LAP is one of the most sought-after routes by SME 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.

Watch this Zee Business video here:

It said the legislative amendments in 2016, which lets the non-banking finance companies recover money under the Sarfaesi Act will also help restrict losses.

Improvements in the property registration systems also lower the administrative and legal hurdles lenders face in limiting their losses during default, it said.

Apart from that, the asset backed securities (ABS) include structural features non-amortising cash reserves, substantial excess spread and the possibility to extend the life of the loans and consequently, the principal repayment schedule that can mitigate the risks posed by higher interest rates, it said.