NBFCs,HFCs to face NPA heat as LAP market in stress: Crisil

Rating agency Crisil has warned that non-banking finance companies and housing finance companies are expected to be hit hard by delinquencies in the loan against property (LAP) market that is likely to rise 70 bps to 3.3 per cent this fiscal.
Delinquencies in the loan against property (LAP) market are set to rise 70 basis points (bps) to 3.3 per cent this fiscal, even as underlying risks stemming from moderating growth, intensifying competition and falling yields come to the fore, Crisil said in a report today.
The rise in delinquencies (measured by 90 days' past due date has been sharper and sooner than expected, affecting NBFCs and HFCs.

Crisil warns that delinquencies are expected to rise even more to 4.5 per cent this fiscal, or 370 bps higher than what's expected in home loans.
"Interestingly, the rise in delinquencies last fiscal is not uniform. While large HFCs and a few NBFCs with robust diligence ecosystems managed their portfolios well, some others have reported over 100 bps increase. We believe systemic delinquencies will rise further as LAP portfolios season," Crisil said.
The LAP segment has been growing at break-neck speed, with assets under management rising 17 per cent to Rs 1.7 trillion in FY17 from Rs 1.5 trillion in FY6, which was a 29 per cent growth over FY15. Banks then joined the fray because of continuing sluggish demand for corporate credit. But this rising trend in AUM is set to reverse with risks manifesting and delinquencies rising, the rating agency said.

Crisil foresees a 200-400 bps decline in AUM growth to 13-15 per cent by fiscal 2020, as competition from banks intensifies and ticket sizes of loans shrink.

Intense competition has also culled yields by 200 bps in the past 18 months, materially narrowing the spreads between LAP and home loan rates. But profitability is unlikely to decline by much because borrowings costs have fallen, too. As a result, net interest margins to slip 50-70 bps to 3.5-4 per cent this fiscal.
"One LAP segment where yields and profitability have sustained so far is loans under Rs 25 lakh, because of fewer lenders. However, small-ticket loans are not an easy business to master. Higher risks to cash flows of borrowers, collateral quality issues, and high operational intensity make rapid scale-up difficult in the segment," the report said.

Lenders that prudently assess borrower cash flows, control loan-to-value ratios, practice strict valuation discipline, and keep a hawk's eye on portfolios will be able to sustain a profitable business over the longer term. In this business, cash flows are the key driver of repayment trends, and collaterals offer only a fall-back option, the report added.