Lower retail participation and declining broking revenues are compelling equity brokers to look elsewhere. One of the growing areas is the segment of loans against property, or LAP, which analysts say has grown substantially in the last 2-3 quarters.
?LAP could contribute 20-25% of revenues for brokerages in the next 3-4 years,? said Anshuman Jaswal, senior analyst at Celent. Adds Amit Goenka, national director – capital markets, Knight Frank India: ?It is a double bonus for brokerages as they earn a steady interest income and more if clients avail of additional services.? In contrast, equity broking business, depends on daily volumes traded by its clients, which in turn is dependent on market conditions. LAP is a low-risk business as the level of NPAs are lower.
HNIs and businessmen are tapping this segment because of an uptick in property valuations as property prices have been appreciating by 12-15% every year. ?Pledging property is no longer a taboo for businessmen,? said Apul Nayyar, CEO, Moneyline Credit, the NBFC arm of IIFL. ?They find it a convenient means to fund their working capital requirement and inventory management, or to invest in another property, trade in markets or simply facilitate cash flows.?
The NBFC arms of brokerages such as IIFL, Religare, Edelweiss and Indiabulls are eyeing a healthy growth in this segment. For instance, in the lending business, LAP comprised more than 40% of IIFL?s loan book in FY10. That number is expected to touch 60% in FY11. According a recent Citi report, Edelweiss is venturing into the LAP segment and is targeting Rs 800-900 outstanding in the first year and Rs 5000 crore in 3 years. The loan to property value is typically 60-65%, which means against a value of Rs 100 one can borrow Rs 65. The interest rate is 12%-15% per annum, and the loan period is 2-10 years for residential properties. The value of the property can vary from Rs 35 lakh to Rs 2 crore and the valuation is done based on whether the property is residential or commercial, its age, locality and the builder.
LAP is more of a banking product but customers are finding it more convenient to approach brokerages as the time taken for loan approval is relatively shorter, says brokers. And, unlike loans against gold and personal loans, LAP gives access to higher loans. ?It is cheaper compared to a personal loan, which comes at an interest rate of 15%-plus,? said Goenka.
Goenka, however, warns that the scheme may be risky for clients who use the money for trading. ?The spread is not that large, if one assumes returns of about 18-20% from the equity market. While monthly returns from equities are not guaranteed, one has to make regular loan repayments to the lender,? said Goenka.
And with more brokerages entering this space, competition is set to get tougher. ?It?s a commoditised market and it?s difficult to differentiate one?s offerings or bring in product innovations,? admits Nayyar of IIFL.