Mortgage companies are considering seeking margin money on loans against property (LAP) as the spectre of diminishing real estate value looms, giving rise to fears that a fall in home prices could erode the buffer in such loans. Analysts have been sounding alarm bell on risks building up in the LAP portfolio due to higher loan-to-value (LTV) ratio, high ticket size, high balance transfer and granting of loans based on cash flows, especially to small businessmen who are now hit by demonetisation. “There would be a shrinkage of 5%-10% in LTV ratio of new loans. Lenders have been aggressively giving an LTV of 70%-75% in LAP,” said Kalpesh Gada, senior vice-president, Icra. “Those lenders would also ask existing borrowers to make part payment on fears that real estate prices would fall.”
“Those who have lent at LTV of 60%-70% would have to make some adjustments,” said R Vardarajan, MD, Repco Home Finance. “Our LTV is at 50%. We will not be affected even if realty prices fall by 10-20%. On existing books, margins will come down.” This portfolio has become riskier due to top-up and lower interest rate from new lenders. Delinquencies are higher in LAP at 2% compared with about 1% for home loans.
Now, demonetisation has increased the risks. Firstly, it may cause realty prices to fall 15-20% as customers baulk at cash transactions. Secondly, it has affected the cash flow of borrowers in the unorganised sector by 30%-50%. Some borrowers with small businesses have, however, pre-paid their loans, say industry executives.
Some SMEs have started moving to cashless transactions, but business reduced by 30-50% in November. December is the true test of their willingness to move to cashless transactions, said an analyst who did not want to be named. On November 21, the Reserve Bank of India relaxed the prudential norms on asset classification by an additional 60 days for lenders for dues payable between November 1 and December 31. This has given some respite to housing finance companies in managing asset quality .
Credits ET Realty