Terming the current situation as credit negative for Indian asset-backed securities (ABS) backed by loans against property, analysts Daniel Gan and Wei Pei said that slowing property price growth was curtailing recovery prospects. According to the rating agency, the pace of property price growth has slowed in major Indian cities as a result of monetary tightening over the past year. This has reduced the willingness of lenders to refinance loans against property.
“Delinquencies will increase, but structural protections will curb deals’ exposure to losses. We expect loan delinquency rates for LAP ABS, which have increased over the past year, to continue to rise. However, LAP ABS are well protected, because of the deals’ structural protections, including non-amortising cash reserves and excess spread,” Moody’s said.
The central bank has raised the policy repo rate by a total of 250 basis points since May 4, 2022, to bring down elevated domestic inflation. The repurchase rate is currently at 6.50%.
As a result of the central bank’s rate hikes, yields on 10-year government bonds and Marginal Cost of Fund-based Lending Rates (MCLR) have hardened, the rating agency pointed out, adding that the MCLR is the rate used by most banks to determine lending rates for NBFCs.
“The higher repo rate, bond yields and MCLR have pushed up the cost of both market and bank funding for NBFCs, compressing their net interest margins and prompting them to raise rates for LAP. LAP securitised in India ABS have floating interest rates, so repayment amounts for these loans have increased as lenders have raised borrowing costs,” the analysts said.
The repayment amounts would weigh on SME borrowers’ capacities to repay debts even if the central bank were to keep rates on hold from here, the analysts said, pointing out that higher interest rates, increasing costs amid elevated inflation and a subdued operation environment for small businesses had exerted downward pressure on SME borrowers’ ability to meet debt repayments.Moreover, the cumulative rate hikes over the past year have made it less likely that loans against property borrowers would be able to refinance debt on more affordable terms if they were unable to meet repayment amounts, Gan and Pei said.
The only silver lining for asset-backed securities such as loans against property is structural protections in deals, the analysts said. According to them, domestic LAP ABS have non-amortising cash reserves and a substantial excess spread which provides deals with liquidity and buffers against losses.
“The cash collateral coverage for LAP ABS we rate is improving and averages between 41.5% and 69.2% of the outstanding principal on deals’ pass-through certificates, depending on the deal origination year,” the analysts wrote.
