Banks, NBFCs shift focus away from unsecured loans to loan against property

As stress continues to linger in the unsecured segment of retail lending, LAP has emerged as an attractive avenue for banks and NBFCs besides gold loans

Amid rising stress in unsecured lending, banks and non-banking financial companies(NBFCs) are turning towards loan against property, a secured lending retail product. Further, with a rising push towards lending to the micro, medium and small enterprises (MSME) sector, the loans against property (LAP) portfolio has seen a significant growth as loans to MSMEs are also classified under the LAP portfolio.

 

According to a recent CareEdge report, the MSME LAP market has grown over 50 per cent, from Rs 7.5 trillion to Rs 11.3 trillion over the past two years. Within this, the micro-LAP rose by 60 per cent to Rs 1.6 trillion.

 

LAP is a secured loan where the loan amount is sanctioned against a property pledged as a collateral. MSME LAP is essentially a mortgage loan for MSMEs, allowing them to borrow funds by using their property as security.  

 

“The year-on-year (YoY) growth in mortgage loans, which are LAP, was 19 per cent, reflecting robust potential in the LAP portfolio. It is preferred because first it is the secured part of retail lending and second bank’s NIM (net interest margin) is very well protected, and lastly, other products in the retail segment are highly competitive in nature,” said a senior banking executive at a public sector bank.

 

As stress continues to linger upon the unsecured segment of retail lending, LAP has emerged as an attractive avenue for banks and NBFCs besides gold loans. Owing to rise in real estate rates, increasing thrust on MSME lending, financial institutions have been focusing on increasing their LAP portfolio. 

 

“If we compare home loans versus LAP, as a bank, we will choose LAP because, housing segment is highly competitive with everyone entering into the housing segment combined with affordable housing,” said a senior banking official at another public sector bank.

 

India Ratings and Research said in one of its reports that unsecured loan space will be under stress in the first half of the current financial year. In addition, the report noted that delinquencies for unsecured personal loans remained high, ranging from 3.5 per cent to 3.6 per cent.  

 

RBI data on sectoral deployment of bank credit shows that since November 2023, there's been a pickup in the pace of growth in “other substitute” segments which are backed by a strong collateral and are less risky from the bank's asset quality perspective. There's also been a slowdown in growth of credit card dues and unsecured loans.

 

“Banks have become selective in lending and after increasing risk weights on unsecured lending, banks are resorting more to secured products which are backed by sound collateral,” said a head of retail assets at a private bank.

 

George Alexander Muthoot, MD, Muthoot Finance said, “…due to ongoing stress in the microfinance sector, the focus is on secured lending to the MSME sector under the LAP portfolio.”

 

Further, Punjab Housing Finance in April launched a separate vertical for LAP. Girish Kousgi, managing director and chief executive officer, said that the new vertical would help on profitability because LAP would come at a higher business and this vertical cuts across all the segments. Currently, LAP is about 28-29 per cent of the overall portfolio, he added.

 

However, officials have highlighted some concerns in lending against property as it requires multiple verifications. Moreover, detecting forged documents is one of the major hurdles in lending against property. Analysts pointed out that as banks and NBFCs are shifting to LAP and gold loan products, these segments may get overheated and can give rise to stress loans in secured segments.