Delinquencies in loan against property to rise 70 bps to 3.3% in fiscal 2018: Crisil

Mumbai: Loans given against property as collateral may see a sharp rise in defaults in the current financial year, credit rating agency Crisil Ltd said in a report.

The agency expects delinquencies in the loan against property (LAP) market to rise 70 basis points (bps) to touch 3.3% due to moderating growth, high competition and falling loan yields. One basis point is one-hundredth of a percentage point.

The LAP market has witnessed a sharp growth in the last couple of years. The growth, however, is expected to slow down as non-banking finance companies, housing finance companies and banks face deteriorating asset quality and fall in loan yields.

According to Crisil, the LAP segment has been growing at a “break-neck” speed, with assets under management (AUM) rising 17% to Rs1.7 trillion in fiscal 2017 from Rs1.5 trillion in 2016, which, in turn, was a 29% growth over 2015. Banks rushed in, in part due to sluggish demand for corporate credit.

“But this rising trend in AUM is set to reverse with risks manifesting and delinquencies rising. Crisil foresees a 200-400 basis points (bps) decline in AUM growth to 13-15% by fiscal 2020, as competition from banks intensifies and ticket sizes of loans shrink,” the note stated. Yields have fallen 200 bps in the last 18 months due to high competition, it further said.

Crisil also flagged risks arising out of low “seasoning” of loans in the segment due to stiff competition, which is likely to hamper asset quality as risks are not assessed sufficiently.

“Intensifying competition has meant ‘seasoning’ of LAP loans —which is important to asset quality—has been low, with aggressive intermediaries spurring balance transfers in approximately 7 out of 10 loans. While the typical contracted tenure of a LAP product is 7-10 years, majority of customers have been shifting out in 36-42 months,” said Crisil. Seasoning refers to ageing of loans which allows the lenders to assess the repayment behaviour of the borrower.

The deteriorating in asset quality, however, has not been uniform. Krishnan Sitaraman, senior director at CRISIL Ratings said, “While large HFCs and a few NBFCs with robust diligence ecosystems managed their portfolios well, some others have reported over 100 bps increase. We believe systemic delinquencies will rise further as LAP portfolios season.”

Crisil expects the LAP segment to remain profitable in the lower-ticket LAP segment.

“One LAP segment where yields and profitability have sustained so far is loans below Rs25 lakh, because of fewer lenders,” said Subha Sri Narayanan, associate director, CRISIL Ratings. “However, small-ticket loans are not an easy business to master. Higher risks to cash flows of borrowers, collateral quality issues, and high operational intensity make rapid scale-up difficult in the segment,” she added.

CRISIL estimates net interest margins (NIMs) to slip 50-70 bps in the LAP market to decline to 3.5-4% . Return on assets are also expected to fall to 1.4-1.8% this fiscal, compared with 2-2.5% in fiscal 2016.