LAPs can be risky bets

Most borrowers of loans against property pin hopes on future cash flows from their business

Delinquencies in loan against property (LAP) are on the rise. According to Crif Highmark, one of the country's four credit bureaus, the total LAP portfolio of banks, non-banking finance companies (NBFCs) and housing finance companies (HFCs) stood at Rs 3.7 lakh crore in September 2017. Non-performing assets had risen to 3.75 per cent in September 2017 from 2.98 per cent a year earlier. Rating agency Crisil too expects delinquencies in the LAP segment for non-banking finance companies to rise by 70 basis points to 3.3 per cent by the end of this financial year. While lenders can be expected to tighten their lending norms (some have reduced loan-to-value ratio), borrowers too need to exercise greater caution when taking these loans.

Businessmen find loans against property attractive due to the interest rate of 9-12 per cent, which is lower than what they would have to pay for a personal loan or an unsecured business loan. The tenure of these loans is also higher (5-15 years), allowing people to repay them more easily. 

Experts attribute the rise in NPAs within this segment primarily to economic developments of the past 12-18 months. “Macroeconomic events such as demonetisation and implementation of GST have impacted the self-employed segment in the short term, and that has translated into pressure on asset quality in the LAP portfolio,” says Ajit Velonie, director, CRISIL Ratings. He adds that balance transfer in LAP is high. While the typical contracted tenure of an LAP is 7-10 years, the majority of customers shift out in 36-42 months, which has constrained the seasoning (aging) of LAP portfolios. Slowdown of AUM growth and some dilution in underwriting standards are other factors, says Veloine. According to Parijat Garg, vice president, Crif Highmark, “The slowdown in real estate is a key factor responsible for the rise in NPAs in this segment. Many people who opt for LAP expect to pay a part of the EMI from the rental derived from the property. But sometimes they struggle to find tenants or to get attractive rental rates.”   

The risk in LAP is that you have to mortgage your property with the lender. “In case of failure to repay the loan, the lender has the authority to repossess the property and recover the dues by selling it. In addition, the borrower would also end up lowering his CIBIL score, thereby hampering his eligibility for future loans,” says Harshala Chandorkar, chief operating officer, TransUnion CIBIL. 

Borrowers should avoid overleveraging. “Balance transfers happen either because the customer is offered lower rates or because he is extended a higher loan amount against the same property. The latter increases the risk for the borrower due to overleveraging. The higher the leverage, the greater is the sensitivity of debt servicing to stressed cash flow scenarios,” says Veloine. Adds Rachit Chawla, founder and chief executive officer, Finway Capital: “Avoid being over-optimistic about future cash flows and have alternatives in place in case those cash flows don't materialise.” Veloine warns that the loan amount should be used only for cash flow generation activities. 

As soon as you experience difficulty in repaying, speak to your lender. “If you have taken a loan for five to seven years, get the tenure extended. This will reduce your EMI, and hence the pressure on monthly flows. When your cash flows improve, prepay the loan,” says Garg.

Finally, make sure that the property is valued at a fair market price. “If you fail to repay, keep track of the auction process and ensure that you get the balance that is left after paying what you owe,” says Chawla.