Mumbai: The loan against property (LAP) portfolio of banks, non-banking finance companies (NBFCs) and housing finance companies (HFCs) could be the next bad loan pressure point, according to a study by India Ratings & Research Ltd.

Delinquency rates—defined as the proportion of loans where payments are 90 days past due— may rise to 5% in two to four quarters, the report said. That represents a three-fold increase since fiscal 2014.

"A combination of stagnant property prices especially in metros and large cities, which are the primary markets for medium and large ticket LAP, and squeeze on refinancing due to risk aversion building up in some financiers is bringing the stress to the fore," the report said.

The rating agency estimates that 2.5 trillion has been given as loans against property. However, since most banks do not disclose separate numbers for LAP, only 17 HFCs and NBFCs with a portfolio of 1.1 trillion were considered for the study.

After studying the books of all these companies, the rating agency concluded that delinquencies had seen a consistent rise over the last two years, irrespective of the date of origin of the loan. Typically, newer loans show lower delinquency rates than older loans. “The LAP market is entering into a delicate phase, where though yields are shrinking, credit costs have started to build up," the report said.

The rating agency believes that competition from banks and other established companies has led to some NBFCs diluting their risk mitigation practices. In a majority of the cases, property valuation is outsourced to third-party valuers, which do not follow any standardized process, the rater noted.

Non-residential properties, which include industrial, commercial, freehold land and unoccupied residential property are increasingly being accepted as collateral, it said. This proportion could go as high as 30% of the portfolio for some firms. Realisation on liquidation is lower for these properties.

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