National Housing Bank looks to cap loans advanced by housing finance companies
Mumbai: The National Housing Bank (NHB) could be looking to cap the amount of loan that can be advanced by housing financiers against property mortgaged with them, said Sriram Kalyanaraman, chairman of NHB.
The decision to cap the Loan To Value Ratio (LTV) in the case of loan against property comes after the portfolio saw sluggish growth and build-up of stress over the past few years.
“LAP (loan against property) especially in mostly high-value loans is based on commercial property which are not appreciating. While you have a value on paper, it might be difficult to repossess and sell it. We would advise caution particularly to medium-sized home loan companies as they might not be able to take the shock if a combination of things go wrong,” Kalyanaraman added.
Currently, there is no LTV ratio mandated for loan against property. However banks and housing finance companies (HFCs) extend up to 50-55% of the market value of the property as the loan amount. In some cases where lenders take over loans from other lenders, LTV ratio can be as high as 80%.
LTV denotes how much of the property value a bank can lend to a borrower. An 80% LTV indicates that the borrower will have to shell out only 20% of the property value and the rest can be financed through banks or HFCs.
“When you lend to an individual to buy a house, it is the most secured thing. There is an emotional attachment and a sense of ownership that goes into it. Hence the repayments will be regular. But when you give for commercial use, the soft factors would not be there and hence one needs to evaluate it more carefully. To that extent, we have adjusted the risk weights. We are at present watching this segment a little more closely,” Kalyanaraman added.
A 18 January research report by Ambit Capital Pvt. Ltd had warned of inflated valuations in LAP loans by mortgage lenders owing to aggressive assumptions undertaken to suit borrowers’ eligibility. The report highlighted that the valuation differences in some cases is as high as 100% between two valuers.
“We expect LAP exposure to higher ticket borrowers (Rs1 crore ticket size) to be affected more due to difficulties in liquidating property collateral of higher values. However LAP for residential and self-occupied properties would do much better in terms of asset quality performance versus commercial and non-occupied properties,” the report added.
India Ratings estimate combined LAP portfolio for the NBFC/HFC segment at upward of Rs1.4 trillion.
“The sustained pressure on borrowers’ cash flow together with largely stagnant property prices especially in metros and large cities -- the major markets for LAP financiers—is contributing to the stress. This has also led to risk aversion building up in some financiers reducing refinancing of loans,” said Harshal Patkar, senior analyst—financial institutions, India Ratings, a credit rating firm.
Among housing financiers, Ambit named Indiabulls Housing Finance Ltd and PNB Housing Finance Ltd to be most exposed to risk due to higher share of LAP on their books and higher average ticket size.
“We decide the LTV depending on the cash flows of the borrower and not entirely on the value of the property. Our LTV at Orignation is around 49% and the maximum is upto 65%,” said Ashwini Kumar Hooda, deputy managing director, Indiabulls Housing Finance Ltd.
HFCs have increased their exposure to riskier loans like LAP over the last six years due to rising competition from banks and falling profitability in the home loan portfolio. However, growth in this segment has slowed down after demonetisation and implementation of goods and services tax. According to an August 2017 report by rating agency ICRA, growth in LAP slowed down to 17% in FY17 from 30% in FY16 and as high as 70% in FY10. Delinquencies have also risen with 90 day past due rising to 2.4% as of March 2017 compared to 2% in FY16 and below 1% in FY10. ICRA expects delinquencies to increase by 50-100 basis points from the current levels by March 2018. One basis point is a hundredth of a percentage point.
Many home financiers have therefore decided to go slow on this portfolio fearing slippages in the portfolio.
“Our non-housing book grew 10% in the first quarter of FY18, down from the peak growth of 32% seen in FY16. We decided to slow disbursements in the high ticket (Rs1 crore and above) non-housing segment given asset quality concerns. Our internal policy is to cap the proportion of non-housing loans to overall loans at around 20%,” R. Varadarajan, managing director of Repco Home Finance Ltd. “A loan to at origination value of 60% or less is ideal, based on our experience.”
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