COVID disruption will hurt MSME recovery prospects: Moody’s

The carnage caused by Covid-19 pandemic is going to hurt the recovery prospects of small and medium enterprises according to ratings agency Moody’s.

Copy: Credit Rating Agency Moody’s Investors Service in a statement has stated the economic and property market disruptions caused by the continued COVID 19 pandemic will end in higher delinquencies within the Micro, Small and Medium Enterprises (MSMEs) sector in India hitting the refinancing prospects.

The surge in delinquencies will hit companies’ Asset-Backed Securities (ABS) over the balance 6 months, hurting chances of recovery, Moody’s added.

The credit rating agency expects India’s economy to contract 11.5% within the fiscal year ending financial year ending March 2021. Dipanshu Rustagi, Assistant vice president and analyst at Moody’s said, “As the economy slows, SME loan delinquencies – which are on the increase since January – will still increase and property prices will face increasing pressure.”

 “This will challenge SMEs’ refinancing of Loans Against Property (LAP) and hurt the recovery prospects for defaulted loans, in turn affecting the quality of the Indian SME ABS that we rate, which only entails LAP,” Rustagi added.

ET reported, Government of India’s incentive measures like guarantees on loans to MSMEs will only negate rising risks and help ease liquidity pressures within the sector but will not fully shield the sector from a downturn.

Many SME businesses have stalled due to the coronavirus disruptions, while demand for SMEs’ goods and services has fallen along with side job and income declines, Moodys said.

 “We expect the challenging operating environment for SMEs will continue for the rest of 2020, which will increase the risk of loan delinquencies in the SME ABS, we rate, the 90 plus days delinquency rate as a percentage of current balances rose to 6.59% in July 2020, from 2.16% in December 2019 before the coronavirus disruptions.”

The rating agency further added “Given that 55%-65% of underlying loans were on coronavirus-related payment moratoriums between March 2020 and August 2020 and lenders do not report loans under moratorium as delinquent, the reported delinquency rate has understated the true extent of problem loans since April.”

 Moody’s expects the 1 -30 days delinquency rate to extend materially in September, followed by a rise in the 90+ days delinquency rate a couple of months later.

 The problem is two-fold. The slump in property prices will further hurt recovery as all the underlying assets in the Indian SME sector are backed by loans against property (LAP). The prevailing loans are either mortgaged against residential properties or commercial properties.

 In the event of default, lenders usually consider selling the mortgaged properties to recover outstanding debt amounts but this too will not be possible amidst waning property prices. Lenders also will be more cautious with LAP lending, which can reduce refinancing options.

However, the non-amortizing cash reserves and substantial excess spreads in the Moody’s rated portfolio will provide liquidity and a few buffers against losses. The relatively low loan-to-value (LTV) ratios of the underlying loans also will limit losses from defaults.