Delinquencies in the loan against property (LAP) market may rise 70 basis points (bps) to 3.3% in FY18, ratings agency Crisil said in a note on Thursday. The note also flagged risks emanating from moderating growth, intensifying competition and falling yields in the LAP market, and added that while these risks had been anticipated a year ago, the drop in asset quality ever since has been steeper than expected. “The LAP segment has been growing at break-neck speed, with assets under management (AUM) rising 17% to Rs 1.7 lakh crore in fiscal 2017 from Rs 1.5 lakh crore in 2016, which in turn, was a 29% growth over 2015,” the note said. While the space was earlier the reserve of non-banking finance companies (NBFCs) and housing finance companies (HFCs), banks have entered the market in the recent past because of muted demand for corporate credit.
Crisil observed that the growth trend in AUM is set to reverse with the emergence of risks and a climb in delinquencies, and it expects a 200-400 bps decline in AUM growth to 13-15% by FY20. Yields have also seen compression in the last few quarters, Crisil said. “Intense competition has culled yields by 200 bps in the past 18 months, materially narrowing the spreads between LAP and home loan rates,” the note said, adding, “But profitability is unlikely to decline by much because borrowings costs have fallen, too. As a result, Crisil estimates net interest margins (NIMs) to slip 50-70 bps to 3.5-4% this fiscal.” While credit costs will tick up with a rise in delinquencies, they will remain manageable, the ratings agency said. However, they may cause return on assets to fall to 1.4-1.8% in FY18 from 2-2.5% in FY16.
“Given the pressure on yields, the ability to manage operating and credit costs will determine business sustainability over the medium term,” Crisil said. NBFCs and HFCs with a large customer base and cross-selling opportunities could benefit from a lower cost of customer acquisition and access to their credit history, it added.