Delinquencies in loan-against-property segment may rise in 2018: Moody’s
Moody’s says lenders have adopted a more cautious approach while extending LAP because of rising delinquencies and subdued operating environment for SMEs
Mumbai: Delinquencies in loan-against-property (LAP) segment are likely to increase in 2018 but such defaults may not result in significant losses for lenders, Moody’s Investors Service said in a report on Tuesday.
According to the rating agency, lenders have adopted a more cautious approach while extending LAP because of rising delinquencies and subdued operating environment for small and medium enterprises (SME).
Many lenders, including commercial banks, categorize LAP as SME loans because promoters of such companies often submit their immoveable property as collateral.
“Although property prices have continued to increase, year-on-year growth rates have moderated from the higher levels of 2015 and 2016 and this has also led lenders to tighten underwriting standards over the past year. As noted, we expect property prices to remain steady at around current levels in 2018,” Moody’s said.
It added that because of tighter underwriting standards, asset-backed securities (ABS), with LAP as underlying asset, issued in 2018 is expected to have low loan-to-value (LTV) ratio of 40-50%.
LTV denotes how much of the property value a bank can lend to a borrower.
Moody’s said that LTV of 45-50% on average is comfortable and this would mean that losses will be relatively low if borrowers default. “In addition, owner-occupied residential properties are the main type of collateral, providing borrowers with a strong incentive to avoid default,” it said.
The share of LAP in ABS portfolios of SMEs those were delinquent for at least 90 days increased to 2.4% in March 2017, from 2% a year ago.
According to Moody’s, rollout of the goods and services tax (GST) and demonetisation may also impact the ability of the SMEs to repay because they may now come under the tax ambit.
“Many SMEs in India have traditionally operated outside the auspices of tax authorities. With the implementation of GST and demonetization, many more SMEs will come under the ambit of tax authorities and will have to pay tax for the first time, in addition to bearing associated compliance costs,” it said.
Editor's Picks »
- France’s Engie appoints Rothschild to find a buyer for Indian solar biz
- Going into 2019, has brand Modi lost some of its sheen?
- Sun Pharma’s cancer injection from Halol plant gets USFDA nod
- A click moment for us was raising ₹100 crore in seed round to chase our dreams: Manish Lunia
- HDFC mutual fund arm to launch its ₹2,800 crore initial share sale next week
- Fund managers slashing allocations to equities in emerging markets, shows BAML survey
- ICICI Lombard tightens grip on profitability in a lean growth quarter
- TCNS Clothing IPO: Valuations capture the upsides adequately
- Nightmare of Indian Accounting Standard 115 comes to haunt firms in the real estate sector
- What is driving the optimism in stocks of paint companies?