But this has meant that NBFCs have been trimming their loan book rather than giving out loans like they used to before. Flow of funds to micro, small and medium enterprises (MSME) have been hard hit because NBFCs were a critical source.
Given the slowdown in the economy, MSMEs have been having a tough time servicing their existing borrowings as well. The deeper troubles in real estate sector have added to their woes as property values have fallen affecting loan to value ratios.
So it is not surprising that pockets of stress are visible and delinquencies are seen rising in loan against property (LAP) based securitisation.
Moody’s Investor Service expects delinquencies to increase in LAP simply because borrowers are not able to refinance. LAP is a popular route used by micro, small and medium enterprises (MSME) to get funding.
Such lending has slowed down since December which indicates that borrowers are not able to access finance easily. “LAP delinquencies, 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," said Moody’s Investor Services in a note.
When the quality of loans falls that of a pool of such loans should also deteriorate. Ergo, asset-backed securities that have LAP as underlying have shown a sharp rise in losses.
Losses have risen to over 1% of the original size of loan pool from sub-0.5% levels in September last year. Of course, these are still low levels but the surge warrants monitoring.
That said, delinquencies have shown some easing in recent months, Moody’s noted. “Loan losses will be limited because the loans are secured, typically with properties as collateral, and have relatively low loan-to-value ratios," the rating agency said.
Even so, it would be wise to monitor LAP securitisation transactions considering that MSMEs are operating in a stressful environment.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!