Higher interest rates have increased repayment amounts and limited refinancing options for SME borrowers who have availed loans against property, heightening default risk for these loans, Moody’s Investors Service said on Monday.

“Even if the RBI were to keep rates on hold from here, the repayment amounts will weigh on SME borrowers’ capacities to repay debt. Furthermore, the rate increases over the past year have reduced the likelihood that LAP borrowers will be able to refinance their debt on more affordable terms if they can no longer meet repayment amounts,” Moody’s said. LAP refers to loans against property.

It said the interest rate hikes over the past year have increased funding costs for non-banking finance companies (NBFCs).

With rising funding costs, the NBFCs have increased interest rates for loans against property (LAP) to small and medium-sized enterprise (SME) borrowers, which is heightening repayment and refinancing risks for these loans. This situation is credit negative for Indian asset-backed securities (ABS) backed by a loan against property (LAP), Moody’s said.

“Higher interest rates in India have increased repayment amounts and limited refinancing options for SME borrowers with LAP (loans secured by mortgages over residential or commercial real estate), heightening the risk of delinquencies and defaults,” Moody’s said.