Defaults on loan against property extended by non-banking financiers could see a sharp increase due to a combination of stagnant property prices especially in metros and large cities, which are the primary markets for large and medium ticket LAP, and squeeze on refinancing due to risk aversion building up in some financiers, according to India Ratings and Research (Ind-Ra).
Ind-Ra has said that delinquencies in LAP portfolio could significantly increase in the next four quarters and may even exceed 5 per cent on a static basis for a few players. It said that signs of early stress are visible in the LAP business loan pools, including a sharp rise in 90 days past due delinquencies for some of the large players.
Ind-Ra analysed data from the LAP portfolios generated over the last five years and observed that all loans, irrespective of their years of origination, are experiencing a concurrent rise in delinquencies in 2016.
Ind-Ra believes that the LAP market has now entered into a delicate phase with rising delinquencies accompanied by shrinking yields, thereby leaving limited buffers to absorb unexpected shocks. The average lending rate in the urban high-ticket LAP segment has shrunk to close to 300 basis points (bps) from 500 bps over State Bank of India’s base rate.
The rating agency feels this may not be adequate to absorb any spike in credit costs. Ind-Ra also believes the eventual losses through the liquidation route could be higher than what is being priced in by non-banking financial institutions (NBFIs).
Ind-Ra believes that over the last few quarters, portfolio churn, through balance transfer among NBFIs, has been the significant driver of incremental loan growth. Additionally, a large segment of the market utilised third-party intermediaries to expand its loan portfolio. It has led to less than optimum credit assessment rigour. Furthermore, elevated balance transfer has led to inadequate seasoning for a part of the portfolio.
Ind-Ra has observed that small ticket LAP portfolio has shown a better performance than large ticket loans, though the portfolio is less seasoned. Newer geographies are facilitating volume growth and due to limited competitive intensity, are allowing lenders to price in the risk. Also, the recent applicability of SARFAESI Act (to systemically important NBFIs and on a loan amount higher than INR10m) may improve portfolio performance as it could reduce slippages and improve recovery.