Loan Against Property- Rising Stress, Shrinking Spreads

Delinquencies in India's non-banking financier's loan against property (LAP) portfolio could significantly increase in the next four quarters and may even exceed 5% on a static basis for a few players, says India Ratings and Research (Ind-Ra). The signs of early stress are visible in the LAP business loan pools assessed by Ind-Ra, including a sharp rise in 90 days past due delinquencies for some of the large players. 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.

Ind-Ra analysed data from the LAP portfolios generated over the last five years and observed that all loans, irrespective of their years of origination, are experiencing a concurrent rise in delinquencies in 2016. Ind-Ra believes that the LAP market has now entered into a delicate phase with rising delinquencies accompanied by shrinking yields, thereby leaving limited buffers to absorb unexpected shocks. The average lending rate in the urban high-ticket LAP segment has shrunk to close to 300bp from 500bp over State Bank of India's ('IND AAA'/Stable) base rate, which in Ind-Ra's opinion may not be adequate to absorb any spike in credit costs. Ind-Ra also believes the eventual losses through the liquidation route could be higher than what is being priced in by non-banking financial institutions (NBFIs). Ind-Ra's rated transaction pool data for the housing loan mortgage portfolio acquired by asset reconstruction companies since 2006 show a recovery rate of over 100% of principal outstanding, but when adjusted for the time value it drops to 70%. Furthermore, this recovery ratio drops sharply to 25% for SME loans where collaterals include either industrial or commercial properties.

Ind-Ra believes that over the last few quarters, portfolio churn, through balance transfer among NBFIs, has been the significant driver of incremental loan growth. Additionally, a large segment of the market utilised third-party intermediaries to expand its loan portfolio. Ind-Ra believes that it has led to less than optimum credit assessment rigour. Furthermore, elevated balance transfer has led to inadequate seasoning for a part of the portfolio.

Ind-Ra observes that small ticket LAP portfolio has shown a better performance than large ticket loans, though the portfolio is less seasoned. Newer geographies are facilitating volume growth and due to limited competitive intensity, are allowing lenders to price in the risk. Also, the recent applicability of SARFAESI Act (to systemically important NBFIs and on a loan amount higher than INR10m) may improve portfolio performance as it could reduce slippages and improve recovery.

Ind-Ra believes that credit appraisal systems based on borrower cash-flow assessment and standardised valuation practices would be critical risk mitigants. Ind-Ra expects players with largely residential mortgage collaterals to fare well on asset quality metrics. Finally, strong equity and liquidity buffers and matched asset liability profile would continue to differentiate players in this segment.

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