Big-ticket loans, higher loan-to-value ratios and increasing delinquency rates have increased risks in the loan against property (LAP) business, which has attracted many non-banking financial companies (NBFCs) recently, credit rating agency Crisil Ltd said in a statement on Wednesday.
NBFCs are increasingly offering loans higher than Rs.2 crore and with loan-to-value (LTV) touching 75% in some cases, Crisil said, adding that nearly a third of the LAP portfolio comprises loans with either high LTV or big-ticket size and 5% of those loans carry both these risks.
“Further, loans with commercial property as collateral are surging, and now constitute a third of all incremental loans,” the report said, pointing to the fact that a lot of new lenders have joined this business attracted by the higher yields and success of peers.
“With competition intensifying, business dynamics are changing. CRISIL is seeing incipient signs of a build-up in risks,” said Pawan Agrawal, chief analytical officer, Crisil Ratings.
Increasing use of intermediaries to source business is leading to more balance transfers (30% of portfolio annually), which masks the true repayment capability of borrowers, Crisil said.
The report pointed out that higher risks are already being reflected in a increase in delinquencies for NBFCs. “Delinquent loans (90+ days-past-due, on a two-year lagged basis) increased to 3% as on March 2015, from 1.9% two years ago. CRISIL estimates the ratio will rise further to 3.3% by March 2016. This is significantly higher than 1% seen for home loans,” Crisil said.
However, easier monetization of property, larger loans and longer tenures for borrowers and higher profitability for lenders means that LAP will remain an attractive segment for both.
“Lenders’ ability to control loan to value, properly assess borrower’s cash flows, practice strict valuation discipline, and enhance portfolio monitoring will be crucial to stave off deterioration in portfolio quality,” Crisil said.
“LAP remains among the most profitable asset segments for non-banks, despite increasing risks and moderation in yields following intensifying competition. The business can absorb a moderate increase in credit costs,” said Rupali Shanker, director at Crisil Ratings.
Crisil estimates that non-banks’ return on assets stood at 3.2% for LAP in 2014-15, and will hover around 2.5% in the medium term.
The rating agency expects this business to grow at 22% annually in the next four years, and double to Rs.5 trillion by March 2019. NBFCs corner half of the market for these loans while private and foreign banks have lent most of the rest, Crisil said.
NBFC’s LAP portfolio has grown at 36% annually over the last three years, well ahead of the financial sector’s growth of 30%, according to Crisil.
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