MUMBAI: The Covid 19 induced economic and property market disruptions will lead to higher delinquences by India’s micro, small and medium enterprises (MSMEs) hitting their refinancing prospects, credit rating agency Moody’s Investors Service said on Thursday.
The rise in delinquences will hit these companies’ asset backed securities (ABS) over the remainder of the year and hurt their chances of a recovery, Moody’s said.
The credit rating agency expects India’s economy to contract 11.5% in the fiscal year ending March 2021. “As the economy slows, SME loan delinquencies – which have been on the rise since January – will continue to increase and property prices will face increasing pressure,” said Dipanshu Rustagi, assistant vice president and analyst at Moodys. “This will challenge SMEs’ refinancing of loans against property (LAP) and hurt the recovery prospects for defaulted loans, in turn affecting the quality of the Indian SME ABS that we rate, which only entail LAP,” Rustagi said.
Government of India’s stimulus measures like guarantees on loans to MSMEs will partially offset rising risks and help alleviate liquidity pressures in the sector but will not fully shield the sector from a downturn.
Many SME businesses have stalled because of the coronavirus disruptions, while demand for SMEs’ goods and services has fallen along with job and income declines, Moodys said.
“We expect the challenging operating environment for SMEs will continue for the rest of 2020, which will increase the risk of loan delinquencies. In the SME ABS we rate, the 90 plus days delinquency rate as a percentage of current balances rose to 6.59% in July 2020, from 2.16% in December 2019 before the coronavirus disruptions. Given that 55%-65% of underlying loans were on coronavirus-related payment moratoriums between March 2020 and August 2020 and lenders do not report loans under moratorium as delinquent, the reported delinquency rate has understated the true extent of problem loans since April,” the rating agency said.
Moody’s expects the 1 ton30 days delinquency rate to increase materially in September, with the 90 plus days delinquency rate increasing a few months later.
The decline is property prices will also hurt recovery all the underlying assets in the Indian SME ABS Moodys rates are backed by loans against property (LAP), mostly secured by residential properties located in large cities and metropolitan areas, and in some cases by commercial property in these areas.
In the event of default, lenders usually rely on selling the mortgaged properties to recover outstanding debt amounts but this will not be possible amidst declining property prices. Lenders will also be more cautious with LAP lending, which will reduce refinancing options.
However, the non-amortizing cash reserves and substantial excess spreads in the Moody’s rated portfolio will provide liquidity and some buffer against losses. The relatively low loan-to-value (LTV) ratios of the underlying loans will also limit losses from defaults.
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