Business Loan Interest Rates: What’s ahead?

Business loans are playing an expository role in the growth of most businesses. The need for business financing is further acute for the underserved Micro, Small and Medium-sized Enterprises (MSMEs). Sometimes, they lack working capital and have a bad liquidity position that makes it difficult for them to have the projected growth. Besides, they have very limited access to loans, especially unsecured loans. However, the emergence of Fintechs has come as a boon for such businesses needing timely capital and also at low-interest rates. 

 

Business loans give easy access to many new and existing businesses to grow and expand. However, the ease of repayment depends on the interest rates, which are further dependent on diverse factors.  The basic thing that determines the interest rate and loan tenure is the creditworthiness of the applicant. And different lenders use different techniques to ascertain this. 

 

While most banks offer only secured loans, most MSMEs are turning their hopes on Fintechs. The creditworthiness of an applicant depends on his business’ debt: income ratio. And for this, the lender looks into the business’s assets, liabilities, any existing loan(s) and all other expenses and obligations. 

 

Secured loans come against collaterals and hence they are mostly available at lower interest rates as the risk of failure of loan repayment is less likely. And even in such incidences, the claim is recoverable against the collateral. But they involve a hefty amount of documentation and the process may take quite long. 

 

But various Non-Banking Financial Companies (NBFCs) are using digital methods for unsecured loans. They assess the creditworthiness of the applicant through tech-led risk assessment models. Here, they rely generally on data-driven credit decisions to underwrite loans. 

 

Business profitability, how long the business has been there, its cashflow history and analysis and profit loss statements also play a role in determining the interest rates. The net income of the business owner is yet another determinant in estimating the risk of loan repayment failure and its possible recovery modes. 

 

How are lending rates going to behave going forward? 

The lending rates for business loans are decided by the financing companies with reference to the Base Rate as determined by the Reserve Bank of India (RBI). How inflation is impacting the Indian economy is well-known. In its bid to control this, there has been a rise in the repo rate by the RBI.

Due to the hike in this benchmark rate, it is expected that the lending rates going forward will also accentuate. However, the demand for business loans from NBFCs is on a rise. Due to the enhanced flexibility, they can offer business loans at better interest rates as compared to the banks.

One of the key contributions to this comes from the RBI’s removal of the interest margin cap on lending rates. And the same is a result of RBIs new regulatory framework for microfinanciers.

NBFCs have spanned the market in terms of target borrowers and geographies thereby increasing the volume of loans disbursed and also at a faster pace. With an increase in volume, the financers can tend to keep their interest rates to a minimum.

Although the sector is penetrating deeper into the existing markets and exploring new opportunities, asset quality pressure is becoming an increasingly important reason that can lead to an increase in the lending rates, even by the NBFCs.

So, it may be the best time to get business loans financed at the earliest before the new interest rates are set to increase the EMI pressure thereby decreasing the borrowing capacity.