Borrowing costs for SMEs may increase

Mumbai, July 16: 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 GST and demonetisation have also placed stress on the SME sector, which with the rising interest rates will exacerbate,” Moody’s said.

Hike in interest rates by the RBI and hardening of yields since late2017 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 Dipanshu Rustagi said.

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 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.