NBFCs and HFCs have been bringing down their exposure in LAP lending to MSMEs due to funding squeeze which is caused by liquidity crises in the financial sector after the default of IL&FS in September last year.
Refinancing options for micro, small and medium enterprises (MSMEs) are likely to reduce as non-banking financial companies (NBFCs) and housing finance companies (HFCs) are pulling back on loan against properties (LAP) lending to small businesses on the fear of potential loan delinquencies and defaults, Moody’s Investor Service said in a report on Wednesday.
NBFCs and HFCs have been bringing down their exposure in LAP lending to MSMEs due to funding squeeze which is caused by liquidity crises in the financial sector after the default of IL&FS in September last year. The value of LAP assets under management by non-banks only rose by 8.3% over six months to December 2018, which used to be 15.4% over the previous six months, the report said.
The operating environment remains challenging for NBFCs and HFCs and they continue to face issues with accessing funding. As a result, Moody’s analysts do not expect LAP lending by NBFCs and HFCs to pick-up significantly in the next few months. This will have a direct impact as the slowdown in lending reduces refinancing options for the borrowers, which is credit negative, Moody’s wrote.
Besides, lower liquidity is leading to declining real estate prices in some large cities, and in other states, prices are rising at a slower pace which has hurt recovery prospects for defaulted loans, making NBFCs doubtful about lending against properties.
When refinancing is readily available, borrowers having difficulty in making repayments can refinance to more affordable loans or higher value loans, potentially masking any weaknesses in their abilities to repay and avoiding delinquencies and defaults.