Refinancing risk rising for LAP amid liquidity crisis: Moody's

Delinquencies in loans against property to small businesses may go up as the liquidity squeeze is forcing non-bank lenders to pull back from lending to such enterprises, global rating agency Moody's said on Wednesday. This situation is a credit negative for the asset- backed securities, the agency warned.

The Indian financial sector, especially the non-bank lenders, has been facing troubles ever since infra lender IL&FS started defaulting a year ago. Initially, there was a period of systemic liquidity stress, which has now become selective where a few non-banks are finding it difficult to arrange money, hampering their lending operations.

"Indian non-banking financial companies (NBFCs) and housing finance companies (HFCs) are pulling back on loan against property (LAP) lending to micro, small and medium sized enterprises (MSMEs) because of the funding squeeze caused by the liquidity crisis in the country's financial sector," the agency said. "This situation is credit negative for asset-backed securities (ABS) backed by LAP to MSMEs, because it will reduce refinancing options for these small businesses, potentially leading to loan delinquencies and defaults," it added.

The LAP assets under management growth slowed to 8.3 per cent for the July-December 2018 period as against 15.4 per cent for the six months before this, it said, adding this slowdown in lending reduces the refinancing options for the borrowers. Additionally, moderating real estate prices hurt refinancing and recovery prospects in case of defaulted loans, it said.

It said the delinquencies in LAP portfolios, which have increased for the past three years, will continue to increase because of "higher refinancing risk and the muted operating environment for MSME borrowers." However, losses to financiers will be limited because the loans are secured and have relatively low loan-to-value ratios, it said..