Loan against property need not be a sin word for NBFCs

Standards of underwriting for loan against property have improved for listed NBFCs

Time and again there is enough caution sounded off about the risky nature of loan against property or LAP. But, industry experts call this caution as stretched and believe that all LAP loans should not be painted with the same brush. They argue that many of the listed non-banking finance companies (NBFCs) have improved their underwriting standards substantially to an extent that today they are well-equipped to stomach even 20-30 per cent fall in property prices. Underwriting is the process of detailed credit analysis deployed by financiers before sanctioning and disbursing loans based on information provided by their customers as well as verification of property/deal details, customer’s financial capacity, etc. 

Many NBFCs such as Indiabulls Home Loan, PNB Housing, Repco, Dewan Housing, and Canfin Homes, which have 12-24 per cent exposure to LAP loans in their lending portfolio, have improved their assessment and monitoring procedures for LAP. Sanjaya Gupta, managing director, PNB Housing Finance, says that most NBFCs have learnt a lot of lessons from past experiences and that they have moderated their stance on LAP. “NBFCs aren’t as aggressive as they were earlier on LAP and fortunately in India, LAP happens mostly on proprietary loans (by self-employed individuals),” he says. 

Industry experts also say that when competition is at its highest, it may be tough to sustain net interest margin without building a safe LAP portfolio where interest rates charged to customers are 200-400 basis points higher than those for home loans.

Restricting the loan-to-property value (LTV) at 45-50 per cent has emerged as the most successful tool in keeping the asset quality in LAP segment under control. Ashwini Kumar Hooda, deputy managing director, Indiabulls Home Loan (which has the highest exposure to LAP loans among listed NBFCs), emphasises that it is the primary house which is taken as the collateral (asset pledged to avail the loan) for LAP and 90 per cent of his company's LAP are in Tier-I cities, where property prices haven’t corrected alarmingly after demonetisation. 

Gupta adds that financiers also need to monitor the end-use of the loan. “If a LAP loan is taken for working-capital purpose for a revenue-yielding business by a self-employed person and not for consumption purposes like buying a car or wedding, the risk is less,” he points out. (Working capital is a measure of both a company's efficiency and its short-term financial health. The working capital ratio (current assets/current liabilities) indicates whether a company has enough short-term assets to cover its short-term debt. Anything below one indicates negative W/C (working capital). While anything over two means the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.  Also known as "net working capital".) 

Credit-monitoring practices have also improved. While a few companies engage credit-rating agencies to monitor these loans, some keep a close watch on high-value loans above Rs 1 – 2 crore. 

Therefore, instead of seeing LAP as risky, investors could assess the underwriting standards of the NBFCs to draw better comfort from their investments.