Demonetization might further encourage non-banking financial companies (NBFCs) to look away from their loan-against-property portfolios.
The growth rate of the loan-against-property business is likely to shrink to 15-20% this financial year, as compared with 22-24% two years ago, said Krishnan Sitaraman, senior director, financial sector ratings and structured finance ratings, at Crisil Ltd.
Since 2012, the loan-against-property loan book of NBFCs has grown by about 3.5 times, from Rs.43,000 crore to Rs.1.48 trillion as of 31 March this year. However, over the past year, the business has been going through a rough patch because of the slow growth in property prices and stiff competition from private banks who have access to cheaper funding.
Typically, under the loan-against-property business, lenders follow a 65-70% loan-to-value formula for a residential or commercial property. As the value of the property increases, the borrower is allowed a top-up. People who run micro, small and medium enterprises (MSMEs) are usually the borrowers.
The decision to withdraw Rs.500 and Rs.1,000 notes has meant that a number of smaller businesses that are heavily dependent on cash have suffered. Add to this the expected impact on property prices due to demonetization removing the cash component in realty deals, and analysts are expecting some part of NBFCs’ loan books to get impacted.
According to Sitaraman, while the situation on demonetization is still evolving, the loan-against-property business has begun seeing increased delinquencies—the share of loans that have begun delaying payments. “Cash flows of MSMEs are the first port of call when it comes to these loans. So, when their business starts suffering, they start displaying delinquencies,” he said.
Crisil estimates that 90-day delinquencies are likely to rise to 2.2% by March 2017, compared to 1.9% a year ago. NBFCs are currently functioning on a 150-day asset recognition cycle, which means that unless payments are pending for over 150 days, the asset will not be classified as non-performing.
In October, India Ratings & Research Pvt. Ltd released a report which said that the loan-against-property segment is likely to see 90-day delinquencies at 5% in about two to four quarters, showing a threefold rise as compared with 2014. India Ratings also noted that competition from banks and other established companies had led to some NBFCs diluting their risk-mitigation practices, leading to higher risk on their books.
In a majority of cases, property valuation had been outsourced to third-party valuers, who do not follow any standardized process, it said.
Non-residential properties, which include industrial, commercial, freehold land and unoccupied residential property, are increasingly being accepted as collateral, it said, adding that these properties could be as high as 30% of the loan book. This had raised the risk factor on the books of some NBFCs.
Crisil’s Sitaraman, however, believes that the situation isn’t bad enough to warrant concern about lower recoveries that would prompt a sale of assets placed with NBFCs as collateral. As part of its worst-case scenario, Crisil feels that unless there is a 30% fall in property prices, it is unlikely that lenders will fail to recover the amount they have lent.
“The loan-against-property business forms about 70% of the MSME business for NBFCs while the unsecured lending business for this segment forms about 20-25% of the loan book. We should see the ratios shifting in favour of the unsecured lending business going ahead,” said Sitaraman.