Crisil warns of systemic risks in fast growing LAP market

Company expects the loans against property business to grow at 22% annually during the next four years

Domestic ratings agency Crisil expects the loans against property segment to double to Rs 5 trillion by 2019, but has cautioned that risks in the high-margin segment are building up in the banking system.

"We expect the loans against property (LAP) business to grow at 22 per cent annually during the next four years, and double to Rs 5 trillion by March 2019," the agency said in a note here today.

The report, however, warned that risks are gradually building up as competition and maintaining rigorous credit discipline are vital for sustainability of the business.

The report further said the high profitability in the segments will help lenders absorb the setbacks in the near-term.

The LAP business, in which money is borrowed against an already existing property as a collateral, is a comparatively newer product and Crisil said it stands at Rs 2.25 trillion today split evenly between the non-banking lenders including housing finance companies, and private and foreign banks.

"Non-banking financial players have been at the forefront of the surge in LAP, riding on their strengths of innovation, ability to offer products based on customised cash-flow assessment, and faster turnaround times," its chief analytical officer Pawan Agrawal said.

The last three years have seen the industry grow at 30 per cent every year, while the non-banking lenders grew faster at 36 per cent.

Giving more details on the risk, Crisil said NBFCs are offering big-ticket loans of over Rs 2 crore and the loan to value ratios have also risen, touching up to 75 per cent of the value of the collateral in some cases. Nearly a third of the LAP portfolio comprises loans with either high LTV or big ticket size, including 5 per cent that carry both the risks, it said.