CRISIL sees emerging signs of a build-up in risk as competition intensifies
CRISIL expects the loans against property (LAP) business to grow at 22 per cent annually in the next four years, and double to Rs.5 lakh crore by March 2019. However, risks in the segment are gradually building up because of intensifying competition. While relatively higher profitability will give lenders adequate cushion to absorb increase in credit costs in the near term, maintaining rigorous credit discipline will be vital for sustainability over the long term.Non-banks (NBFCs and HFCs) account for nearly half of LAP loans today (of Rs.2.25 lakh crore), while private and foreign banks have lent most of the rest. Says Mr. Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings: Non-banks have been at the forefront of the surge in LAP, riding on their strengths of innovation, ability to offer products based on customised cash-flow assessment, and faster turnaround times. The last three years have seen their LAP portfolio growing at 36 per cent a year, well ahead of the industry's growth of 30 per cent.
Drawn by the success of peers, several lenders have entered the business. Adds Mr. Agrawal: With competition intensifying, business dynamics are changing. CRISIL is seeing incipient signs of a build-up in risks. That's because non-banks are increasingly offering big-ticket loans (value > Rs.2 crore), and loan-to-value ratios (LTVs) have risen to 65 per cent - even touching 75 per cent in some cases - on incremental loans. Today, nearly a third of the LAP portfolio comprises loans with either high LTV or big ticket size, including 5 per cent that carry both the risks. Further, loans with commercial property as collateral are surging, and now constitute a third of all incremental loans. And increasing use of intermediaries to source business is leading to more balance transfers (30 per cent of portfolio annually), which masks the true repayment capability of borrowers.
Rising risks are also getting reflected in higher delinquencies for non-banks. Delinquent loans (90+ days-past-due, on a two-year lagged basis) increased to 3.0 per cent as on March 2015, from 1.9 per cent two years ago. CRISIL estimates the ratio will rise further to 3.3 per cent by March 2016. This is significantly higher than 1.0 per cent seen for home loans.
Says Ms. Rupali Shanker, Director, CRISIL Ratings: LAP remains among the most profitable asset segments for non-banks, despite increasing risks and moderation in yields following intensifying competition. The business can absorb a moderate increase in credit costs. CRISIL estimates that non-banks' return on assets stood at 3.2 per cent for LAP in 2014-15, and will hover around 2.5 per cent in the medium term.
CRISIL believes LAP will remain an attractive segment for both borrowers and lenders. For borrowers, it affords increased monetisation of property through larger loans and longer tenures compared with traditional funding. For lenders, LAP offers strong growth potential coupled with high profitability. But given the rising delinquencies, lenders need to be cautious. Their ability to control LTVs, properly assess borrower's cash flows, practice strict valuation discipline, and enhance portfolio monitoring will be crucial to stave off deterioration in portfolio quality.
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