Cost of refinancing loans against property is on the rise for shadow banks

The cost of refinancing loans against property (LAP) is on the rise for the shadow banking sector. Both non-banking financial companies (NBFCs) and housing finance companies (HFCs) are shying away on such loans to micro, small and medium enterprises (MSMEs). While the value of LAP assets under management by NBFCs and HFCs increased by 8.3 per cent over the six months to December 2018, it was down from the 15.4 per cent growth over the previous like timeframe.

In earlier times, strong competition among lenders in the LAP sector made it much easier for borrowers to refinance their loans. When such refinancing is readily available, borrowers who are having difficulty making repayments can opt for more affordable loans, potentially masking any weaknesses in their abilities to repay debt and avoiding delinquencies and defaults. 

In addition to the liquidity crisis, declining real estate prices in some cities and a slower pace of price growth in others curtailed refinancing of LAP and hurt recovery prospects for defaulted loans.