Loan against property to see more stress: India Ratings


MUMBAI: Stagnant property prices is set to add stress to section property loans. Early signs of loan against property (LAP) portfolio of NBFCs could turn bad in the next four quarters are visible. They may even exceed 5% according to ratings firm India Ratings and Research (Ind-Ra).

“The signs of early stress are visible in the LAP business loan pools assessed by Ind-Ra” said Harshal Patkar, analyst at India Ratings. “ A combination of stagnant property prices especially in metros and large cities, which are the primary markets for large and medium ticket LAP, and squeeze on refinancing due to risk aversion building up in some financiers is bringing stress to the fore ” Portfolio of loan against property is reckoned to be Rs 2.5 lakh crore for the entire financial sector of which almost half or about Rs 1.2 lakh crore is estimated to be on NBFCs book including housing finance companies.

An Ind-Ra analysis finds limited statistical correlation between delinquency rates and loan to value (LTV) ratios. Loans extended over the last five years, irrespective of their year of origination, are experiencing the highest level of delinquencies in 2016.

The LAP market is entering into a delicate phase, where yields are shrinking, says the Ind-Ra report. But credit costs have started to build up. High yields earlier during this decade in the LAP segment (almost 500bp higher than State bank of India’s (‘IND AAA’/Stable) base rate) and negligible credit costs (below 30bps, one basis point is 0.01%) offering a high risk adjusted return had attracted many players. Some lenders did not even had the core competency in the segment.

But intense competition has pulled the yields significantly which have shrunk to about 300bps over State Bank of India’s base rate. After adjusting for yield reversals on NPLs and operating costs, yields may not, at least for few players with uncompetitive funding costs, leave enough buffers to absorb spikes in lending costs.

The quest to expand loan portfolio in the face of intensive competition has diluted the use of risk mitigation practices of lenders, notes the report. Non-residential properties including industrial, commercial, freehold land, unoccupied residential property, among others are increasingly being accepted as collaterals. This proportion could go as high as 30% of the portfolio for some players.